Last week we described the sunk cost and the ostrich biases and how they distorted the way change decision makers view the past. Other biases affect our view of the present. These present-based biases can be further split into problem definition, and solution finding.
Problems in problem definition
“If I had only one hour to save the world, I would spend fifty-five minutes defining the problem, and only five minutes finding the solution.” (Einstein)
The way problems are stated is called the problem ‘frame’. How problems are framed determines which alternatives are considered, how they are evaluated, and can ultimately pre-determine the decision results. Frames simplify decisions, reduce complexity and narrow options, but timing is everything and premature simplicity in problem definitions is no virtue. Going after the solution is understandable, we want to get to an answer quickly and not dwell in the problem. It is even a recommended leadership behaviour to say ‘don’t bring me problems, bring me solutions’ which is guarantee that the problem definition will be skimped.
Late in the last millennium, I was called into the largest utility in the UK to assess their incentive system. A year earlier, call center workers had (after considerable wrangling with unions) agreed to a performance related pay system. To management’s amazement and frustration, performance had decreased. To solve their ‘incentives problem’, they had benchmarked call center rewards versus others in the industry, came up short, and got to work fixing it (paying a consultant nearly $1m in the process). Management had thus solved the ‘incentives problem’, but not the real problems called ‘how do we motivate workers?’ or the real problem ‘how do we increase performance?’. As a result, performance decreased! They had tried to fix a symptom, fixed it, and worsened the problem. If solving the right problem and analyzing cause and effect were not tricky enough, solution formulation has its own biases and traps.
Early research on how decision makers come up with solutions unearthed fascinating discoveries. A solid formal process should create criteria, weight the criteria appropriately, select a wide range of alternatives, evaluate each alternative against the criteria and select the best one. Researchers studied how people actually made choices, from choosing a college, to selecting a job, to business teams selecting a strategy. It looks nothing like that. Few of those steps are followed. Criteria are ill-defined, and inconsistent. The process is chaotic. Generally a set of easily recognizable solutions is identified, and after informal evaluation, the first that appears ‘reasonable’ or good enough is selected.
This is called ‘satisficing’, or sometimes the ‘garbage can’ model of decision making. Research continues to show that people and organizations operate more like solutions looking for problems than problems looking for solutions. We decide, intuitively, and then retrofit criteria in order to make sense of the decision for ourselves and others.
Intuition is not the enemy of formal decision making, and the best studies of decision making include intuition as valid, often quicker, and sometimes superior to formal processes. The leadership challenge is to know when formality and structured processes should be followed, and when not. In short, when to trust models and analysis, and when to ‘go with the gut’. The essential leadership knowledge here is not to confuse the two, not to pretend rigor when the garbage can model is being used.
The specialist trap (a.k.a. the hammer trap)
“We don’t see things as they are, but rather as we are.” (Anais Nin)
Early in my career in Big Consulting, I was asked to meet with a CEO, his CFO and several team members to understand their issues and propose how PwC could help. The symptoms were clear enough, they had been the largest and most profitable in their market, but had now fallen to third place in size with dwindling profit margins. I attended with one partner who specialized in marketing, one who specialized in strategy, and another who specialized in re-engineering and process efficiency. I was there as the ‘team alignment and performance’ guy. We listened for 90 minutes, asked probing questions, took copious notes and then repaired to our office overlooking the Thames River with vistas east to the London Docks where the East India Company’s ships used to come and go in the 1600s, and west to the Houses of Parliament and Big Ben.
From atop the world, in our glass eyrie, we set to outlining our proposal to the client: what solutions we could propose that would meet their (ample, but not unlimited) budget? Twenty minutes into that meeting, we were deep in a conflict of our own. The marketing partner was certain that a more bespoke and customizable product range was required. The strategy partner thought they could gain market share in new markets and that PwC should analyze and assess new markets for size, growth, competition and profitability and recommend ways of entering those markets via joint ventures, or greenfield investment. The re-engineering partner thought that the biggest gains would come from stripping out costs by streamlining their core business processes. It was equally clear to me that the team lacked a clear vision, did not agree on strategic priorities, and was wrestling with interpersonal and trust issues.
Had we attended the same meeting? We had 100 years of business and consulting experience between us, and were each fairly certain that our pet approach would yield the biggest gains and should be done first (the client was not going to pay for it all.)
The ‘Ready, fire, aim’ trap
If this is Tuesday, it must be product lines. That is how it felt, because it seems like yesterday we were organized around regional lines, and the day before around ‘markets’ (Financial Services, Healthcare, Technology, and Government). Of course the days were really years, but it seemed then that leadership could never stop fiddling with the organizational structure. As consultants it seemed more like fashionistas from Milan were running the show, wondering how what was assuredly best-practice and a critical priority one year became so quickly sub-optimal the next.
Because of the potentially powerful effect of structure on performance, the majority of CEOs launch a ‘reorg’ during their first two years on the job. Yet one study found that most of those fall flat. A recent Bain & Company study of 57 ‘reorgs’ between 2000 and 2006 found that less than one-third produced any meaningful improvement in performance. One reason they fail is that the formal organization structure does not begin to capture the power of informal networks of influence and exchange. When boxes are redrawn, those relationships remain intact.
The Herd Trap (institutional bias) –
“A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.” (JM Keynes)
If reorganization is sometimes a knee-jerk and unnecessary response, aping the competition is an equally seductive trap. Again, game theory suggests why. If we adopt a contrarian strategy, eschewing ‘market wisdom’ we risk looking ‘behind the curve’, or otherwise foolish in the eyes of ‘The Street’. If we follow the herd, we will have good company if things go awry.
No sector, in my experience, does this more than banks. In the late 70s, hotel lobbies in Buenos Aires and Caracas were chocked full of SVPs from European, American and Japanese banks falling over themselves to lend to Latin America which was rapidly evolving from their 3rd world designation with soaring economies and large infrastructure projects. Then came the crisis.
When the cold winds of the late 70s recession began to chill the Latin American economies, their creditworthiness fell, and suddenly bankers became cautious triggering a massive economic slowdown and high unemployment further compromising their ability to pay. The lending bender ended abruptly and banks went cold-turkey on Latin America: they went from being insensitive to risk and exposure to over sensitized thus causing the disaster they were worried about – and economic meltdown in LA.
Rinse and repeat. Japanese housing, Dot-coms. US consumer/ real-estate lending. Markets are supposed to allocate capital efficiently, but banks repeatedly show that they are dominated by herd, not rational behavior consequently crippling countries, and inflicting hardships on their populace.
These many potential traps/ biases show just how precarious the decision making waters can be. Next week, the way our view of the future colors decision making will be explored.
Contributed article: This article is part two of a three-part series by Paul Gibbons who writes on science and business leadership. For a free sample chapter of Paul’s new book Reboot Relaunch – a 12-day program for creating YOU 2.0, go to www.paulgibbons.net.