April 05, 2010
Wisdom has a lot to do with avoiding decisions that look attractive, but will turn out badly. If you have been out late at a party and on the way home your friend says, “I know where we can still get one more drink!” well, that sure sounds attractive but the wise decision is to refrain.
Dr. Sydney Finkelstein, lead author of Think Again: Why good leaders make bad decisions and how to keep it from happening to you is interested in how we can figure out which decisions are at risk of being the really bad ones. If we understand the psychological processes that guide decision making, and look at real examples of where decisions have gone bad, then we can identify red flags to watch for. These red flags are the banners of wisdom.
How Humans Make Decisions
As we get into the topic of decision making we once again have to kill off the rational choice model beloved by economists. Wise management thinkers like Henry Mintzberg, James March and Karl Weick have long argued that the rational choice model doesn’t reflect reality. It’s important to understand the major mechanisms that underlie real decision making.
Finkelstein explains, “We don’t list a bunch of alternatives, identify the pros and cons, weight them and then identify the best ones. That hardly ever happens in real life. What we do is make one plan at a time – usually without discussion, perhaps even without conscious awareness that we are making a decision. We just take the first reasonable option and do it until it clearly isn’t working”
“If a marketing manager has to place ads in some media, she might well just place internet banner ads because that is what she did last time and it worked well, or she read something about it and it seemed reasonable, or it she felt it was the cool thing to do,” says Finkelstein. “She’ll keep doing it until it clearly is not working.”
Young and not yet wise MBAs critique this kind of ‘irrational’ behaviour but humans operate the way we do for a reason.
“We can’t take forever to make decisions,” says Finkelstein, “Imagine if we had to debate the pros and cons of everything. The one plan at a time model works pretty well—at least it does most of time.”
It’s that last phrase “most of the time” that chills the blood because just one really big mistake can be enough to kill a company.
“There’s another thing I want you to understand about the brain,” Finkelstein continues. “Anytime we do anything we file it away and it’s tagged with a memory of success or failure. I call it emotional tagging. When faced with a situation we almost always without thinking make our decision based on those emotional tags.”
Again this makes sense, of course we’ll do what worked for us in the past: it’s the “without thinking” part that you need to watch out for.
“If you look at RBS (the Royal Bank of Scotland)—which is such a disaster that they may be taken over by the British government—their really bad decision was the acquisition of ABN Amro. RBS had made previous acquisitions which had gone well and had got accolades in the press for their great work. So they went out of their way to repeat that experience and chased down the ABN Amro acquisition without proper caution.”
If only RBS had noted some kind of red flag which warned them that their decision making process was at risk of making a serious error then they might has escaped their nasty fate.
(to be continued)
Source: David Creelman
NOTE: Why not attend the “Managing & Making Decisions” workshop to be held from April 28-29, 2010 at the G-Hotel, Penang to learn more? You can download the brochure from this website.