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What Is The Cost Of Success?

EXECUTIVE DECISION BIASES

Laura Ellis, M.Sc. I/O Psych. Page 1

uring the SARS Outbreak in Canada, I was returning to Toronto after visiting family in London. The flight

was empty so I was upgraded to business class, where I sat next to the CEO of a global supply chain

organization headquartered in the UK. Through small talk I learned that she was concerned her organization

may have hit a wall in their efforts to be seen as THE supplier of choice in their operating markets. She related that

the Board was disappointed with the company’s global performance and saw their growth as merely incremental. I

knew little about supply chain but I asked questions out of curiosity. I remember her reaction of surprise, not to my

questions, but to the fact that they triggered ideas and choices she had not yet considered. On my end, I only felt I

offered value by offering to introduce her to another senior executive from Toronto.

This is not another article about the five or seven steps you must take to solve a complex problem. This is

about describing in plain language what typically happens in executive decision-making when we simultaneously

consider all the aspects that influence how we make decisions. While every decision involves a certain amount of

risk, accurate decision-making is simply about selecting the choice with the least uncertainty and the highest

likelihood of success relative to known criteria. In proposing that executive decisions shape an organization’s

performance, I intend to articulate the ways in which executives can enhance decision accuracy.

I don’t know whether the CEO that I met on the plane ever achieved her strategic goals. However, I do

know that the exchange resembles countless interactions I’ve had over time assisting executives in making more

accurate decisions. Often, my inputs merely reflect my curiosity and somewhat limited knowledge about a clients’

technical specialty. Other times, I share insights born of my own expertise in how individual psychology influences

work performance and interpersonal behaviour.

Recently, I was asked by a General Manager to take a look at his 2014 organization-wide business goals.

During follow-up discussions, he asked how I had come to possess the knowledge and expertise I shared with him.

He confessed that in spite of reading extensively on objective and organizational goal setting, benchmarking and

metrics/KPIs, he had never come across what I suggested. Indeed, he concluded, a light went on. There is no magic

– the information I imparted reflects my academic and professional background. While such information would be

common language amongst my peers, to expect that the GM would have the same technical knowledge I have

acquired in over 10+ years of combined education and experience would be completely unrealistic. Yet, it is exactly

the type of knowledge he needed to make the right decision and create focus for his business.

I am proposing that decision making at the senior executive level IS the strongest internal force accelerating

or decelerating an organization’s growth. Strategy, operational excellence, change management, leadership and

innovation are certainly critical to the success of a business. Yet what is even more crucial is the process of

individual decision-making that supports and generates all of these outputs. The more accurate executive decisions

are, more closely performance and outcomes align with long-term and strategic goals. What often gets in the way

of this is when executive decisions reflect biases rather than rational thinking. Firstly, because human thinking is

wired to be irrational, independent of an executive’s intellectual horsepower. Secondly, because even templates

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Laura Ellis, M.Sc. I/O Psych. Page 2

and frameworks that improve accuracy, do not overcome biases caused by one’s psychology, experience or area

of expertise.

During over 10 years of working with executives and assessing their thinking styles, I have been astounded

by the consistent themes in their decision-making. In contrast to executive entrepreneurs and investors, who are

predisposed to taking risks and pay little attention to building contingency plans, corporate executives are highly

risk-averse and like to create, follow, and operate within a clear set of rules. Even when most executives surround

themselves with advisors, they tend to seek the counsel of like-minded people. According to Alex Pentland,

Professor at MIT, this achieves nothing other than reinforcement of the initial direction by creating an “echo

chamber”. As an observer, I’m always amazed how many opportunities are overlooked because of biases. Having

a tendency for taking vs., avoiding risks is only one of the many variables that distort the accuracy of decisions.

I believe that in broad strokes, there are 3 categories that impact decision-making:

1. Familiarity of the decision-maker with the situation for which a decision is required. Here I include

past experiences with similar situations and the success rate in achieving the desired outcomes. High

familiarity with a situation causes habitual responses that might reduce poor decisions under stress or in

the face of unforeseen variables. This is the reason pilots are trained on flight simulators and taught to

handle emergency situations long before they actually occur in reality.

2. The decision-makers’ skills, and their breadth and depth of situational/general knowledge at the

time of the decision. Here I incorporate the technical and general knowledge and skills plus the situation-

relevant data that individuals bring into making the decision.

3. Psychology of the decision-maker. You might find this too general a category if you have a psychology

background. In this context, however, “psychology of the decision-maker” refers to everything internal to

the individual that might shape the decision. Ranging from cognitive processes and biases (thinking,

attention, memory, reasoning), to affect (emotions) and volition (will), one’s psychology is the least overt

component in decision-making and therefore the most difficult to evaluate and manage.

While some elements within those categories remain consistent from one decision to another, others are in flux.

The dynamic interaction that takes place every time a decision needs to be made, whether about overall strategy

or how to communicate quarter-end results to the board, is what ultimately shapes the decision that instigates the

action. It is also what leads to biases of sometimes devastating consequences for organizations. If biases in

executive decision-making are to be ameliorated, then the scrutiny needs to come from all these angles

simultaneously. First, however, executives must learn to recognize their own biases.

Sonar Media Inc. and Flud are two mobile app startups that offer a solid lesson in “how not to” make decisions.

When their respective CEOs shared in the media the decisions that caused the unfortunate demise of two very

promising organizations, the similarities were striking. In both situations, the inability of their leadership to balance

Laura Ellis, M.Sc. I/O Psych. Page 3

strengths like innovation, flexibility and speed to react with opposite traits like risk mitigation, critical thinking,

research and market analysis, caused each organization to engage in futile yet costly endeavours.

Sonar, for example, invested significant capital in responding to user requests for product development without

investigating the potential ROI of their investment. Similarly, they focused their efforts on driving engagements

through social media, but overlooked developing the internal sales capability to sustain revenue growth. Finally,

they focused too much on being ahead of their competitors instead of effectively identifying what they stood for in

the marketplace and strengthening that brand. Similar challenges were also experienced by Flud. I couldn’t help

but think that my corporate executive clients would likely shake their heads in disbelief from reading this post-

mortem analysis. Corporate executive decision-making, however, is just as vulnerable, and would typically favour

the other extreme. In 1996, Blockbuster Video was valued at 5 billion dollars US. I haven’t worked with Blockbuster

Executives to know what decisions caused this once-booming business to close down this year, but with the

knowledge that in 2013 they had not yet joined the internet market, one can easily speculate. A combination of

weak or arrogant leadership, acute risk-averseness or rigidity, and the inability to read market trends led to

catastrophic decisions. Most likely quite similar to what is causing Blackberry to slowly be pushed out of the mobile

technology market.

Though seemingly unrelated, each story points out to four executive decision biases I identify as the “Transactional

Decision Bias”, the “Entrenched Thinking Bias”, the “Unilateral Decision-Making Bias” and the “Negative Appraisal

Bias”.

I. Transactional Decision Bias. It should come as no surprise that executives constantly focus on numbers.

Numbers convey metrics and metrics describe the health of an organization, which drives the share prices.

While justified, this focus anchors the decision-maker’s attention on the timing of the transaction, which then

erroneously extends to the timing of the decision. For example, if the focus is on revenue or engagement

numbers of today, then the decision made to increase those becomes about “what should be done today”. With

that, decisions become the product of short-term problem-solving that create new problems and lead to more

“short-term” problem solving. This vicious cycle significantly reduces the opportunity for tactics to be imbedded

in deliberate and calculated strategies.

At a high-level, it leads to ambiguity over an organization’s sense of direction and it reduces the concept of

“vision” or core purpose to a set of financial goals. At the initiative level it creates an artificial sense of urgency

and short-sightedness. If you have ever played chess, you know that making one move at a time to save the

piece under immediate threat is not how you win the game. One CIO I worked with was constantly frustrated

by the waste of time and resources put into IT projects that turned out to be a dead-end, either because of

unforeseen vendor compatibility issues or because of changes in company direction. If he and his organization

had invested in long-term thinking, they would have influenced different actions in IT decision-making.

Laura Ellis, M.Sc. I/O Psych. Page 4

This is one decision-making bias executives of Flud and Sonar fell into when they failed to anchor their tactical

decisions into the long-term image they were looking to create in the market. The key benefit of thinking in the

future is that it helps eliminate knee-jerk decisions that bring only short –term benefits. It also reduces unrealistic

“high priority” projects that deplete resources/budgets and lead organizations in the wrong direction.

II. Entrenched Thinking Bias. As previously stated, the decision-making process consistently reflects the

decision-makers’ psychology, training, knowledge and experiences. These variables define the value each

executive brings to their own organization. Innovators make decisions that promote new ideas or approaches,

whereas extroverts make decisions that open up opportunities to influence and win people over. While one

approach is no better than the other, the challenges arise when the preferred decision style doesn’t fit the

situation.

The most insightful description of this bias was shared with me by an executive from an aerospace organization.

During a meeting to analyze the loss of a large account and agree on risk-management practices going forward,

my client was struck by the realization that the problem was being approached as an engineering problem

because everyone in the room was an engineer. Entrenched thinking at the executive level causes many

organizations to overlook or misdiagnose the real problem, and subsequently deploy inappropriate resources

to fix it. By contrast, it is the consideration of diverse perspectives that leads to thinking differently and making

better choices. This was the kind of insight the CEO from my flight to Toronto experienced first-hand, and the

bias that neither Blockbuster nor BlackBerry’s executives have recognized in themselves.

III. Unilateral Decision-Making Bias. To quote a famous comics hero, “with great power comes great

responsibility.” This heightened sense of duty fittingly describes the pressures senior executives operate under.

Not only are CEOs and senior executives accountable for multiplying the value of their shareholders’

investments, they are also responsible for protecting the welfare of those working in the business. Predicated

on this reality and often motivated by a high need for control and fear of failure, senior executives make many

critical decisions alone. This approach leads to more gaps than it is intended to overcome. One of the strongest

strategists I have worked with was the CEO of a fast growing American corporation. As if playing a masterful

game of chess, the CEO planned key moves without involving the members of his executive team. At the “right”

time he would share his plans and shepherd his team toward implementation. It is impossible to speculate if

the business outcomes would have been different with a more inclusive decision-making approach. Rarely, if

ever, do organizations question the cost of their success. However, unilateral decision-making at the CEO level,

which often extends into micro-management, causes crises of confidence in the other senior executives due to

the perceived disregard or distrust this behavior inspires. It also places the entire organization at risk because

it hinders professional growth and encourages executives defer ownership, particularly during challenging

times.

Laura Ellis, M.Sc. I/O Psych. Page 5

IV. Negative Appraisal Bias. The fourth bias I often encounter in executive decision-making occurs after it is

determined that a decision was wrong. Reflective of our tendency to experience losses larger than gains, what

should be an evaluation of a poor decision often turns into judgment. Not only does this approach hinder

learning and the prevention of future errors, it also creates a culture where senior executives are afraid to show

vulnerability, admit to mistakes or to lacking a skill. The tendency to judge the person instead of evaluating the

decision-making process causes a wall of self-protection that makes individuals defer accountability or engage

in excessive controlling behaviour and micro-management.

Predicated on how your decisions affect the business, recognizing and managing your biases becomes as much of

a lever to your own success as it is a responsibility to your organization. To support your efforts for more accurate

decisions I have provided few guidelines for your reflection:

1. Seek feedback from your stakeholders of how they describe your decision-making style. Once you identify

themes, create opportunities to balance your style by seeking the perspectives of people with opposing

tendencies to your own. Focus on obtaining alternative choices rather than just acquire data to supplement

your own.

2. Invite input from people with less seniority and experience and of different expertise than your own. It is

diversity and not sameness that leads to progress, growth and innovation.

3. As a senior executive, foster an environment where questioning and challenging one another’s decision is

rewarded and viewed as a mechanism for enhancing decision accuracy.

4. View wrong decisions and mistakes as opportunities to understand your biases rather than rationalize/justify

the decision you made. In choosing the latter approach you only fall into another decision-making bias –

the one cognitive psychologists call “confirmation heuristic”. This refers to our irrational tendency to look for

proof that validates our thinking rather than find evidence to the contrary.

5. Don’t restrict your interests to reading or investigating facts from your industry or expertise alone. On the

contrary, engage in regular reviews of trends from different industries and disciplines.

While those recommendations will likely prove helpful in assisting you make better decisions, I return to my

starting point: they are by no accounts the seven steps to accurate decision-making. Not least of all because

the following variables also come into play:

1. Very few decisions are made with absolute certainty because complete knowledge about all the alternatives

is seldom possible. Thus, every decision involves a certain amount of risk and even the best decisions may

not necessarily yield the desired outcome.

2. Inviting diversity of input also invites conflict, particularly at the senior executive level where egos run high.

To create a decision-making “heaven” inside your organization, the exchanges of ideas and solutions need to be

guided by professionals with specialized skills and knowledge. Advisors come in different shapes and colours. Much

like receiving “counseling” from friends, seeking advice from the wrong source can lead to just as many biased

decisions.

Laura Ellis, M.Sc. I/O Psych. Page 6

Final Thoughts: This is the first in a series of articles on how decision-making shapes the texture of business

environments. Next, I will consider how “canned decision-making” might undermine corporations and cause

undesired societal ramifications