Natural forces shaping strategic thinking…The human mind

The way people think has a fundamental effect on their behavior and decisions they make. Making decisions is the most important job of any executive. It is also the toughest and the riskiest.

The way people think both as individuals and collectively within organizations, affects the decisions that they make in ways that are far from obvious and rarely understood.

Bad decisions can often be traced back to the way they were made: the alternatives were not clearly defined; the right information was not collected; the costs and benefits were not accurately weighed. Sometimes the fault lies not in the decision-making process, but in the mind of the decision-maker.

According to John Hammond, Ralph Keeney, and Howard Raiffa, the working of the human brain can lead you towards a number of traps that you will avoid only if you recognize that they exist, and understand which ones are likely to influence your thinking.

 

The Anchoring Trap

This is where we give disproportionate weight to the first piece of information we receive. It often happens because the initial impact of the first piece of information is so significant that it outweighs everything else, drowning our ability to effectively evaluate a situation.

As a result, the decision (or solution) is anchored on this one issue. To avoid this trap, managers need to be sure about what is really happening, taking care to gather all of the relevant information in order to consider different options.

 

The Status Quo Trap

This biases us towards maintaining the current situation, even when better alternatives exist. This might be caused by inertia or the potential loss of face if the current position was to change.

Managerial prescriptions – beliefs and approaches that are developed over time from experience and become institutionalized – commonly guide strategic thinking and action. When a business formula worked once, it is convenient to believe that it will do so again.

Often there are vested interests in maintaining the status quo. Or people may feel insecure about admitting that things have changed and recognizing the need for a new approach. An organization that as a whole values questioning, experimentation, openness and learning is much less vulnerable to the status quo trap.

 

The Sunk-Cost Trap

This inclines us to perpetuate the mistakes of the past because we have invested so much in an approach or decision that we cannot abandon it or change course. Management accountants offer meaningful insight: it is spent, it is spent; worry about the present and the future not the past.

This trap is particularly significant when managing risk and making investments in new projects or making acquisitions.

To avoid it, managers need to plan intelligently and know in advance where the plan can be modified and by how much. Maintaining a clear focus on the desired outcome is crucial, as is keeping a general overview of the project.

 

The Confirming – Evidence Trap

Also known as confirmation bias, this is when we seek information to support an existing preference and discount opposing information. It may result from a tendency to seek evidence to justify past decisions or to support the continuation of the current favored strategy. There are two fundamental psychological forces at work here.

The first is our tendency to subconsciously decide what we want to do before we figure out why we want to do it. The second is our inclination to be more engaged by things we like than by things we dislike.

Naturally, then, we are drawn to information that supports our subconscious leaning. Therefore, managers should challenge and test existing assumptions to identify weaknesses in current thinking and to research alternative approaches to strategic development.

 

The Overconfidence Trap

Closely linked to the confirming-evidence trap, the overconfidence trap is when people have exaggerated belief in their ability to understand situations and predict the future.

This trap is more subtle and insidious than it may seem: to the overconfident the solution may seem obvious, when in fact a better option lies hidden elsewhere.

It is wrong to assume that the best solution to any problem is easily available; because of the inexorable pace of change, the best solutions often need to be uncovered.

Many factors can cause overconfidence: a lack of sensitivity, complacency (perhaps resulting from past successes), lack of criticism or feedback, a tendency to make assumptions, a confident predisposition or sheer audacity. Confidence is vital for success, particularly with difficult decisions where a steadfast, determined approach is needed.

However, it is important to investigate and understand all the options before deciding on the appropriate action. This means not rushing to judgment and avoiding hasty, ill-conceived action.

 

The Framing Trap

This is when a problem or situation is incorrectly stated, thus undermining the decision-making process. This is usually unintentional, but not always. Managers habitually follow established, successful formulas (or managerial recipes), and form their views through a single frame of reference. Furthermore, people’s roles in an organization influence the way problems are framed.

The framing trap often occurs because well-rehearsed and familiar ways of making decisions are dominant and difficult to change. It may lead managers to tackle the wrong problem – decisions may have been reached with little thought and better options may be overlooked. A failure to define the problem accurately may lead to the wrong solution being implemented incorrectly.

The causes of framing trap include poor or insufficient information; lack of analysis; a feeling that the truth needs to be concealed, or a fear of revealing it; or a desire to show expertise. A simpler cause may be lack of time to frame the problem correctly.

Organizations can go out of business if their managers fail to adapt their frame of reference as the business environment changes. Defining problems accurately lays the foundations for solving them. This requires sufficient time, efficient information systems and good analytical skills. It also depends on a supportive atmosphere where matters can be openly discussed.

 

The Recent Event Trap

Also known as hindsight bias, this trap leads us to give undue weight to a recent (probably dramatic) event or sequence of events. It is similar to the anchoring trap, except it can arise at any time. Research has shown that if an event actually did occur, people often recollect that they had predicted it with a high degree of confidence.

Asked about an event that did not occur, they either claimed that they had not predicted it, or they had placed a low degree of confidence on the prediction of it occurring. Thus we believe that our judgments, predictions, and choices are well made, but this confidence may be misplaced.

 

The Prudence Trap

This leads us to be overcautious about uncertain factors. It reflects a tendency to be risk averse, and is likely to arise when there is a decision dilemma, when it is felt that to continue with the current approach carries risks and that alternative approaches also risks.

Yet good decision-making depends on a willingness to take calculated risks to minimize them. Fear of failure is understandable. Parameters must be set, indicating how and when to manage risk and where experimentation is allowed, and ensuring it is properly managed and controlled.

In conclusion, to lower the stress inherent in decision dilemmas, many people avoid a real decision by deciding to wait and see. This may increase risk because it prolongs an outdated and inappropriate strategy. Over-reliance on a previously winning formula has damaged many businesses that were, in their time, successful first-movers.

It is dangerous to assume that what has worked before will work again. Putting off real decisions reinforces damaging attitudes and allows time for demotivation and cynicism to take hold. Setting clear strategic priorities can help avoid procrastination, as does empowering people and making their responsibilities clear.

By Captain Sam Addaih (Rtd)

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