CLO - August 2011 - (Page 40)
Behavioral Strategy and the CLO
BY E. TED PRINCE
Even with the best information, cognitive bias may skew our decisions to the detriment of business and leadership.
ehavioral strategy — the analysis of thinking processes that incorporate nonlogical, often unconscious processes that can adversely affect intended outcomes — is basic for most managers, but it is essential for learning leaders as well. Traditional management disciplines are based on the idea that when we make decisions, we make the best choice according to rational considerations. These choices might be to take the most profitable route, the choice with the best payoff, the decision that has the most or the best data supporting it and so on. But the real world has demonstrated this is often not the case. More Info, Worse Decisions The idea behind behavioral strategy is that we all have deep cognitive biases (see box) that affect any job or task we perform and dramatically reduce the effectiveness of our decisions. Let’s take the outcome of mergers and acquisitions (M&A), for example. “Why Mergers Fail,” a piece published in November 2001 in McKinsey Quarterly, discusses research findings that indicate at best no more than one-third of mergers or acquisitions are clear successes. At least one-third are clear failures. In about one-third of cases, there is no benefit, although the transaction does not actually fail. Essentially, the outcome of M&A transactions is no better than chance, yet they are based on analysis by executives in the world’s best companies. The failure of Lehman Brothers, for example, came because the cognitive biases of the organization’s senior managers led to overconfidence in their own abilities, and they saw the future in the same frame they had experienced in the past. Lehman Brothers’ situation, or any scenario from a financial organization stricken by the recession, indi40 Chief Learning Officer • August 2011 • www.CLOmedia.com
cates that problems caused by a lack of understanding of cognitive bias are directly tied to the bottom line: failed mergers and acquisitions, large projects being over-budget and business strategies ignoring competitive responses or getting them badly wrong — all of which represent fundamental decisions that are supposed to create value. For example, consider how more information can make decisions worse because of a framing bias. In this bias we tend to see things in a frame of reference we already believe in or are comfortable with. When we see a new mass of information, it will be interpreted by this frame, and data that supports this frame will be used. Add to this the overconfidence bias, in which a manager’s qualifications lead him to believe he has the skills to forecast accurately, and it is easy to see why so many key decisions can go so wrong. Business education may make things worse. Research from McKinsey Quarterly’s 2011 “The Case for Behavioral Strategy” concludes that “good analysis in the hands of managers won’t naturally yield good decisions.” This flies in the face of conventional wisdom, which assumes if we are smart, educated and have the right data, we will make good decisions. For instance, most chief learning officers would believe sending senior executives to an advanced management course run by a prestigious university would be a good learning strategy. However, the implications of behavioral strategy suggest such a course will only reinforce managers’ existing cognitive biases; their decision making will not improve as a result. It might even get worse due to a misplaced perception that the course has made them more prescient. Disciplines and approaches taught in MBA courses are based on these principles: more data is better, more education is better and better logic leads to better business outcomes. Internal learning strategies at corpora-
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