In a 2009 McKinsey Quarterly survey of 2,207 executives, 28 percent evaluated the quality of strategic decisions in their companies as mostly good, 60 percent said bad decisions were about as common as good ones, and 12 percent claimed good decisions were rare! Bad decisions happen thanks to our habits, our training, our past experiences, our organization’s selection practices, our organization’s culture, and perhaps most importantly—our human nature.
Dan Lovallo, professor of business strategy and Olivier Sibony, director at McKinsey & Co. are seeking to improve business decision-making by developing a language for common biases that impact action. They make the case for implementing a behavioral strategy—a style of strategic decision-making that incorporates the lessons of behavioral economics and psychology.
Improving strategic decision-making requires limiting our own biases, limiting others’ biases, and limiting group biases. Easier said than done, because biases are hard-wired in our nature and we can’t overcome them by simply trying harder. Instead, according to Lovallo and Sibony, we need a new approach to our daily leadership activities that impact decisions (such as managing meetings, gathering and analyzing data, and stimulating debate) that will minimize the impact of cognitive biases on critical decisions.
To clarify where the problem lies, let’s take a look at the decision-making process. Any basic decision-making process pretty much looks like this:
Research/Analysis + Insight/Judgment = Decision
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But the equation is deceiving. The trouble is that good research and good judgment doesn’t always add up to a good decision. The way in which that decision is reached matters a great deal. In their research of over 1,000 strategic decisions, Lovallo and Sibony found that the process used in making the decision matters more than the up-front research and analysis… six times more.
Leaders can make better decisions by using a decision-making process that confronts the various biases and limits their impact.
Examples of Decision-Making Processes
- Explicit exploration of uncertainties
- Inclusion of perspectives that contradict the senior leader’s point of view
- Participation in discussion based on experience and skill rather than rank
Part 2 of the series will define the five most common biases in business decision-making.
Part 3 of the series will categorize five decision-making styles of leaders.