Article
How Leader Bias Can Result in Business Failure
February 11, 2021
When trusting your gut is dangerous
Your Decisions Create Your Future
There is an old saying, “Leaders are paid to make decisions.” Whether in business or any other field, making decisions is one of the most critical things leaders do. Look at any company’s performance, and you can immediately see the results of its decision making. It is not an exaggeration that the success of your team or your organization depends on whether your decisions enhance your chances of success or set you up for failure. You are creating your future, one decision at a time. The results you get reflect the effectiveness of your decision-making.
Take a quick look at your own past decisions, both personal and professional, and you will have to concede that your track record is far from perfect. Sure you will see smart, timely, effective decisions that got you where you are today. But if you look objectively, you’ll see over the long term the impact of decisions you made that were impulsive, where you trusted your gut, or you made decisions in the heat of emotion, or you had strong beliefs that got in the way of the facts, and you shaped the analysis to fit the mental model that you already had in your head.
Improving your capabilities as a decision maker involves understanding and making use of what research has discovered about the decision making process, as well as understanding your own tendencies and the things in your behavior and your problem-solving process that can lead you astray. The fate of companies rises or falls based on the wisdom and efficacy of the decisions that are made. And so do the careers and destinies of the deciders.
The Pressure to Make Important Decisions---Fast
As all leaders know, the pressure of decision making is great, and gets greater the higher up you go. The torrent of problems requiring solutions and decisions is relentless. “This is the terror of being a founder / CEO,” said Andreessen Horowitz co-founder Ben Horowitz. “It is all your fault. Every decision, every person you hire, every dumb thing you buy or do — ultimately you’re at the end.” The list below shows just a fraction of the key decisions that entrepreneurs, for example, have to make:
• Should I raise more capital to fuel growth but reduce equity?
• Do I have the right people on the bus?
• Do I have the right people in the right seats on the bus?
• Should I change my role or my job?
• Is it time to lay people off?
• Is it time to give up and throw in the towel on this project?
• Is it time to sell the company or should I go for an IPO?
• How should I deal with this new competitive threat?
• Should I pursue this merger opportunity?
• Is it time to expand or should we stick with what we know?
• Is it time to raise funds?
• Should we make this huge capital investment?
• Should we go all out or conserve cash?
• Should I accept a term sheet now or hold out?
“If There Is Time To Reflect, Slowing Down Is Likely To Be A Good Idea" Daniel Kahneman
How do you make decisions of this importance? Do you take enough time to gather data and carefully weigh all the options, the pros and cons? Do you seek input and feedback from your team and/or your peers and mentors? Do you go with your gut?
According to futurist Stowe Boyd, “There is an enormous lie underlying business, the lie that decisions are made rationally, applying logic and expertise, sifting evidence, and carefully weighing alternatives.” The reality, he says, is quite different. “The science is clear: in general, we don’t really make decisions that way.” [Source: “How to Untell the Lie at the Heart of Business”, quoted in “Don't Fail At Decision Making Like 98% Of Managers Do,” Eric Larson, Forbes, May 18, 2017]
Most people are not totally rational when they make decisions. Far from it. According to Daniel Kahneman, the Israeli-American economist awarded the Nobel Memorial Prize in Economic Sciences in 2002 for his work on the psychology of decision making and behavioral economics, “irrationality often trumps rationality in the human decision-making process.” Kahneman’s findings on the prevalence and influence of cognitive biases challenged the assumption that human rationality was the key factor in decision making. His book, Thinking Fast and Slow (2011) was an international best-seller.
Most people are not totally rational when they make decisions
Because of cognitive biases, impulsiveness exacerbated by time pressure, failure to do due diligence and get all the relevant facts, and overconfidence regarding our brilliant decision-making ability, a disturbingly large number of our decisions turn out to be faulty. Most people are not totally rational when they make decisions. And because we are unaware of what we don’t know, key information may be lacking. Yet in order to make effective decisions, we need all the information relevant to the problem, viable alternative viewpoints, and we also need a process that minimizes the impact of our biases and blind spots.
Ninety-five percent of our decisions use irrational mental shortcuts or rules of thumb that cloud our judgment and impair our decision-making. “The brain,” Kahneman wrote, “is a machine for jumping to conclusions”.
Entrepreneurs are Wired to Move too Fast
Hagberg research (and others) shows that leaders are often optimistic and self-confident risk-takers, who have strong opinions and a bias for action. These are valuable qualities in leaders, but they are a two-edged sword: This confidence, along with a forceful personality, action orientation and clear points of view can lead to a failure to consider what might go wrong, and that they themselves might be wrong. They over-trust their intuition and jump to conclusions, and are therefore more vulnerable to making bad decisions.
The Impact of Biases on Judgment--200 Ways to Make Your Company Fail
Cognitive biases are systematic mental shortcuts in thinking or judgment, mental models or rules of thumb that influence how we evaluate our experiences and make decisions. They can be helpful, in that they make our thinking and decision making faster and more efficient. But they can also lead to faulty judgment, illogical interpretations and irrational choices.
Close to 200 cognitive biases have been identified and explained, many of them by the American-Israeli psychologist Daniel Kahneman. Over 40 years of research, Kahneman found that 95% of our decisions use irrational mental shortcuts that cloud our judgment and impair our decision making. As a leader, it is vital for you to be aware of these biases, which color not only the attitudes and behavior of team members, but also influence your own. But Kahneman’s later research suggested that this is very difficult and almost impossible for most leaders.
“For every complex problem there is an answer that is clear, simple, and wrong.”
– H.L. Mencken, American journalist and social critic
Kahneman’s research makes it crystal clear that if we want to make better decisions, we need to develop preemptive “workaround” strategies that enable us to make decisions that are more rational. One of the best strategies for this is group decision making, where all members of the team weigh in with their insights and perspectives.
As you learn about cognitive biases, you will be able to spot team members falling prey to them in meetings. And if you have built an environment of trust, in which your people can speak freely without fear of retribution, you can use the collective intelligence of your team to help you uncover your own faulty thinking and thereby enable better decisions.
Common Biases That Derail Entrepreneurial Leaders
Sunflower Bias
: People lean in the direction in which the leader is leaning, as sunflowers pivot to face the Sun. Groups tend to align themselves with the views of their leaders, whether overtly expressed or assumed. If a team knows your position on a decision, or believes they know it, the team is likely to be an echo chamber. As Kahneman said, the decision-making process becomes contaminated when people believe they know the leader’s preference.
Confirmation Bias
: Confirmation bias is the tendency to search for, interpret, favor, and remember information that affirms our prior beliefs or hypotheses. (Remember this bias the next time you do a Google search. Are you looking for info that supports your position or your hunch, or are you truly looking to learn?) In the same way, people often discredit information that does not support their views.
Overconfidence Bias
occurs when a person's subjective confidence in his or her judgments is greater than the objective accuracy of those judgements, i.e., you think you’re smarter or more savvy than you really are, or you’re certain that your plan will bring great results when you really don’t have the data to back up your belief. In tests comparing confidence to actual ability, research data regularly show that confidence often exceeds accuracy, that is, people are more sure that they are correct than is warranted.
Optimism Bias
is at play when we overestimate our likelihood of experiencing positive outcomes and events and underestimate our likelihood of experiencing negative events. People with this bias are sometimes quite unrealistic about what might go wrong when making a business decision. When a leader’s subjective confidence in their own judgments is regularly greater than the facts would suggest, disaster could be right around the corner.
Action-Bias
: This is the pressure or tendency to take action NOW, without doing adequate research and/or taking time for analysis and reflection. “Let’s just get the deal done.” Thus we don’t consider all the possible ramifications of our action. When you have this bias, you will tend to overestimate your odds of a successful outcome, and minimize or discount the chances of failure. Bernard Baruch, American financier and advisor to several 20th century presidents said, “Whatever failures I have known, whatever errors I have committed, whatever follies I have witnessed in public and private life, have been the consequences of action without thought.”
Other Common Biases That Can Damage Your Judgment
Affinity Bias
: The tendency to be biased toward people like ourselves, with similar backgrounds, interests, skills, and affinities. This is a common temptation in hiring but may not result in building the strongest team.
Blind Spot Bias
: This happens when you are able to recognize biased thinking by others, while failing to see the impact of biases on your own judgment and decision-making. This is extremely common: In one study of 600 Americans, more than 85% believed they were less biased than the average person.
Status Quo Bias
: Directly opposite the action-oriented bias, status quo bias is an emotional or unconscious preference for maintaining the current state of affairs. “If it ain’t broke, don’t fix it.” This is not based on analysis that shows the current state to be objectively better, but is simply an attachment to the way things are and have been. Sticking to what worked or works now is fine if a rational decision-making process shows it to be the best alternative, but status quo bias can interfere with openness to new ideas, new technologies, and to progress in general.
Effective team leaders need to be willing to change as the company scales. They often hold on to practices that worked when the company was small and flexible and everybody was in one room, but all of a sudden they have 4,000 employees and holding on to what worked for a dozen or twenty just won’t work.
Anchoring bias
: This describes the tendency to base a decision on the first piece of information we receive; it makes a strong enough impression that we become “anchored” to it This happens consistently when making budgetary predictions and financial plans. When considering a decision or course of action, the decision maker gives undue weight to the initial input or information received. These initial impressions, estimates, or data anchor subsequent judgment or analysis.
Self-serving bias
: We believe our failures are due to external factors, that it is “their fault” when things go wrong, but we believe we are responsible for our successes.
Framing
: Frames, according to cognitive scientists, are the different perspectives through which we look at the world. They are mental models that simplify and guide how we make sense out of a complex reality. They limit the effectiveness of our decision-making. This happens when making decisions with a multi-functional or multi-cultural team who have a variety of perspectives based on their background. Marketing, finance, engineering, product, sales, human resources, operations and so on have very different perspectives on many other issues. They look at different factors, and see different risks, opportunities, and potential outcomes, and are driven by different values and interests, all of which frame their decision making. They may have competing perspectives and concerns. Team members from different countries and cultures see the world differently due to their differing values.
“Mental models are deeply held internal images of how the world works, images that limit us to familiar ways of thinking and acting. Very often, we are not consciously aware of our mental models or the effects they have on our behavior.”
- Peter Senge
Trusting Your Gut or Systematic, Reasoned Judgment
In his book, Thinking Fast and Slow, Daniel Kahneman distinguishes between two broad categories of decision making. Fast decision making is essentially intuition-based, and involves feelings, beliefs, hunches that come readily to mind, require little effort or gathering of information, and result in on-the-spot decisions. Slow decision making, on the other hand, is based on reasoned judgment, and involves decisions that take time and effort to make, require careful information gathering, generation of alternatives, and evaluation of the alternatives. “If there Is time to reflect,” says Kahneman, “slowing down is likely to be a good idea."
Rapid decision making can be based on too-little data and too-little time to analyze it, increasing the odds of making miscalculations and mistakes that can have company and career threatening consequences. The antidote would seem to be to slow down, yet business and technology today are moving at warp speed, and leaders of fast-scaling companies must make multiple decisions every day. Not only that, but even the best-reasoned decisions come face to face with randomness and unpredictability. The challenge is to balance speed with the best possible judgment.
Hiring Mistakes Caused by Trusting Your Gut
A prime example of how biases can interfere with wise decision making is in the hiring process. An interviewer who makes snap judgments and lets his or her first impression cloud the interview can make critical hiring mistakes. You think you don’t do this? Guess again: A study from the University of Toledo found that the outcome of an interview could be predicted by judgments made within the first 10 seconds of dialogue! Interviewers then subconsciously spend the rest of the time seeking new information to confirm their first impression, rather than objectively assessing the person in front of them.
What this means is that your initial or gut reaction isn’t always a product of hidden wisdom! It may be a result of unacknowledged biases that can lead you to overlook strong candidates or choose those who are less qualified.
Example: Giving more credence to the fact that the candidate graduated from the interviewer's alma mater than to the applicant's knowledge, skills, or abilities.
Studies and surveys over the last 50 years have shown that 80% or more of the hiring decisions from traditional interviews are based on rapport and likeability and often miss competency, accomplishments, ability, and potential. In short: We like to hire people who are like us, who share our interests, values and style. But they are not always best for the job.
Hiring mistakes can be very costly. A common rule of thumb is that a hiring mistake ends up costing about 15 times the employee’s core salary, including both hard costs and lost productivity as you bring the new hire up to speed. That means a hiring mistake with a $100,000/year employee can cost you $1.5 million, or more. Another thought provoking statistic is that the success rate for hiring at senior levels is estimated to be about 50% - half of all executive hires do not pan out. According to Marc Bennioff, CEO of Salesforce, “Acquiring the right talent is the most important key to growth. Hiring was – and still is – the most important thing we do.”
We Are All Blind to Our Biases and Mental Models
You have probably recognized many of the biases and mental mind-sets described above, and no doubt you can see how they can and do interfere with clear thinking and thus to making the best decisions. However, it is not enough merely to understand the nature of various biases. Kahneman and other decision-making researchers have concluded that it is extremely difficult to eliminate your cognitive biases by yourself. They are too subtle and wired in. It’s like asking a fish to describe water. In addition, awareness of the effects of biases has done little to improve the quality of business decisions at both the individual and the organizational level. To combat the negative effects of bias on team performance, active steps need to be taken.
Catalyzed by the research of Daniel Kahneman and many others, we now know vastly more about how the decision-making process operates, why it so often leads us astray, and what we can do to become a more effective decision maker. I will summarize some of that research in this and follow-up blog posts, with a special angle: much of the existing research concerns how individuals decide. In today’s corporate universe, an enormous number of decisions every day are made in a group setting by teams of various kinds, a far less studied field that I will look at in addition to discussing individual decision making.
Evaluating Your Decisions
Ask yourself
:
• Did you do enough analysis?
• Did you follow a disciplined process to get all the right facts and views on the table?
• Did you avoid letting your strong viewpoint influence your team and narrow the options that were considered?
• Were you overconfident?
• Did you make assumptions that were wrong?
• Did you miss options that might have improved the results?
• Did you miss the big picture?
• Did you focus too much on short-term rather than long-term implications?
• Did you let pressure and stress influence your choice and end up compromising your standards or violating your values?
• Did you act impulsively without validating your intuition?
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