June 24th, 2013
By Nic Paton
“Most leaders make bad decisions. Even great leaders can make bad decisions.” So wrote Tuck School of Business professor, Sydney Finkelstein, in the introduction to “Think Again – Why Good Leaders Make Bad Decisions and How to Keep it From Happening to You”, the seminal 2009 book on decision-making, based on a study of 83 flawed decisions.
Ironically, in the years since the book was published the news headlines have been dominated by bad decisions made by business leaders, bankers and politicians. So what is it that leads supposedly talented individuals to think they’re right when they are really wrong? According to Finkelstein and his co-authors, there are four basic “red flag” conditions that can lead to errors in judgement.
The first of these is “misleading experiences”, or memories that seem similar to the situation one is facing, but in reality are not and contribute to more than half of all flawed decisions. For example, the high profits made from sub-prime lending in the early part of this century seriously misled bankers across the world, causing them to take risks that now seem foolish.
The second red flag is “misleading pre-judgments”, or situations where previous decisions or judgements influence your current thinking. These are most likely to create distortions when leaders and managers are evaluating potential outcomes, as they can lead to commitment to a flawed plan. They can also lead to people becoming fixated on a plan of action that has worked in that past but that is not necessarily suitable for the current situation.
The third red flag is “inappropriate self-interests”, or personal interests that conflict with the responsibilities leaders have for other stakeholders. Most people do not realise that self-interest operates at a subconscious level.
The fourth red flag is “inappropriate attachments”, or the strong emotional feelings people tend to have towards a particular group, tribe, place or possession, and which are inappropriate given the decision. Even as organisations continue to cut back, some “loyalties” overrule rational redundancy decisions and employees are inappropriately retained due to personal alliances. Apparently, it also explains why people were happy to give Bernie Madoff their money without ever questioning how he was investing it – they thought he was their friend.
The difficulty with all this is that while it is possible to identify these red flags, coming up a formula to help people avoid them and so make better decisions is much more problematic.
“In the majority of decisions, our brain’s ability to recognise patterns and our emotions help us make reasonable decisions quickly. If our ancestors had to sit down and debate what to do when a sabre-toothed tiger was attacking, rather than making a fast exit, we wouldn’t be around today,” Finkelstein said in an interview.
“However, the fact that trust in our own judgment is so engrained can make us ignore red flags that warn that a decision was flawed from the start. That’s how bad decisions get made.”
And that, of course, is the crux of bad decision-making. Two factors need to be present to produce one: an individual or a group of individuals who have made an error of judgment, and a decision process that fails to correct the error. Every bad decision starts with at least one influential person making an error of judgment.
But normally, the decision process will save the day: facts will be brought to the table that challenge the flawed thinking, or other people with different views will influence the outcome. So the second factor that contributes to a bad decision is the way the decision is managed. For whatever reason, as the decision is being discussed, the erroneous views are not exposed and corrected.
Open-mindedness, Finkelstein argues, is a key antidote to bad decision-making. Good leaders tend to be more open to new ideas and are intensely curious. They are not afraid to look outside their comfort zones for answers.
Secondly (and one of the hardest for many leaders), they need to be willing to own up to their mistakes and learn from them. They also need to be able accept change and be good at anticipating the changes that are going on around them.
“The best leaders are the ones that make it their business to look at options and do something about correcting a mistaken decision, instead of ignoring the evidence and sticking to a flawed decision,” said Finkelstein.
That’s why it is so important that business leaders don’t just surround themselves with “yes-men”. They need sounding boards – people who do not have the same prejudgment and who will push back and challenge and not be afraid of pointing out contradictory facts.
“Good leaders will get multiple sources of information and get honest feedback to make sure they are not missing or ignoring something that should be obvious. They should encourage open feedback from all levels of the organisation. A lot of people at lower levels are hesitant about going up and saying ‘I think you’re wrong.”
And for important decisions, don’t just make a decision and forget it. Track how things are going and make adjustments. Successful leaders make more decisions, rather than fewer, and that is an important lesson.”
As Finkelstein acknowledged in his book, it’s never easy to accept responsibility or admit a bad decision was your fault. But without owning up, there is never going to be any learning and leaders will continue to make bad decisions.
Nic writes for Management-issues.com