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In addition to the biases that degrade judgments, research shows that problems arise from the processes that people use to make decisions. Problems include bounded awareness and the use of flawed decision-making heuristics. Bounded AwarenessBounded awareness, described by Max Bazerman and Dolly Chugh [4], refers to the well-documented observation that people routinely overlook important information during the decision-making process. One cause is our tendency to become overly focused. Focus limits awareness, and important information outside the range of focus can be missed. Thus, an airplane pilot attending to his controls can overlook the presence of another airplane on the runway. Cell phones can distract drivers and contribute to car accidents. |
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George Day and Paul Schoemaker [5] observe that companies are often slow to recognize important developments at the periphery of the business that turn out to be strategically important. Examples include the music industry's failure to foresee the threat of Napster-type services, Polaroid's bankruptcy resulting from the rapid rise of digital photography, and Wal-Mart's surprise at social concerns leading to community resistance to new stores. Studies show that unexpected information is particularly easy to miss. In one experiment, participants were shown a video of an exciting basketball game. There is a 5-second interval during which a person in a gorilla costume walks through the game thumping his chest. Few people recall seeing the gorilla. Changes that occur slowly are often not recognized until it is too late. This may explain, in part, business scandals. At Enron, for example, accounting irregularities were adopted slowly. Like the boiling frog, executives may have been lulled into a sense of comfort, unaware that they were in hot water. The Challenger space shuttle disaster provides an example of a situation wherein important information existed, but was not sought out. On the day of the launch, decision makers argued whether the low temperature would be a problem for the shuttle's O-rings. Seven prior launches with some sort of O-ring failure were examined, but no pattern between failures and temperature emerged. After the fact, data were analyzed for all 24 previous launches. The expanded data indicated that the Challenger had more than a 99% chance of malfunctioning [6]. 
Figure 4: Data may have been ignored. Sometimes information is known, but not acted upon. For example, the drug company Merck did not withdraw its pain relief drug Vioxx (Figure 4) from the market until 2004. Yet, evidence of the drug's risks was reported in a medical journal as early as 2000. The delay in taking action cost Merck dearly—Over $200 million has so-far been awarded in claims. Why didn't Merck withdraw the drug sooner? The warning was available, but it was ignored. Group dynamics hinder information sharing. Teams may discuss information, but the discussion usually conveys information that is widely known, not information that is uniquely known to a single team member. Psychologists say that this is because sharing something that others already know produces positive reinforcement in the form of the agreement of others. However, introducing into the discussion something that only you know typically doesn't generate positive feedback—"People just sit there, and it is unclear what happens next." Organizational structures can institutionalize bounded awareness. Organizational silos and multiple layers of management hinder information flow. Information doesn't get transmitted well across silos, and management layers can filter out messages management doesn't want to hear. Advice:
Decision-Making HeuristicsJust as people use heuristics to make judgments, executives often rely on simplified reasoning to make difficult decisions. According to decision theorist Herbert Simon, complexity, limited time, and inadequate mental computational power reduce decision makers to a state of "bounded rationality." Decision-making shortcuts can save time and ease the psychological burden of decision making. However, like other judgmental biases, there are circumstances where the use of such heuristics may result in bad choices. Reasoning by AnalogyReasoning by analogy means choosing a course of action based on an approach found effective for an analogous situation. For example, the business model for Toys R Us was supposedly developed based on an analogy with supermarkets. Similarly, Intel reports that it moved into low-end chips to avoid U.S. Steel's mistake in not pursuing the market in low-end concrete reinforcing bars. Dangers arise when analogies are built on surface similarities only. For example, numerous companies have unsuccessfully attempted to copy Dell Computer's build-to-order business model. Steep declines in microprocessor prices is what gives Dell the advantage (Dell saves money due to the very short time between when it needs to purchase a processor and when the computer is sold). Thus, the analogy fails for industries that aren't experiencing rapidly declining supply costs. Rules of ThumbBusiness rules of thumb include, "the processing power of computer chips doubles every 18 months," "a new business needs to have 4 consecutive quarters of profits before launching a public offering," and "a public health risk is acceptable if the probability of fatality is less than one-chance-in-a-million." The problem with rules-of-thumb is that they ignore specifics and can become outdated with changing circumstances. For example, if you used a rule of thumb that a fast-food restaurant is worth 2 to 3 times its annual revenues, you might end up paying too much for a restaurant with declining sales, old equipment, and health code violations. Mortgage lenders who stuck with the old rule of thumb that borrowers can spend no more than 25% of income on mortgage payments lost out in areas of rapid price appreciation to more aggressive lenders. Seeking Means Rather Than EndsIf it is difficult to determine the choice that best achieves the end goal, choosing based on some presumed means to the end can seem like a reasonable approach. Means-based decision making is especially likely if the end goal is difficult to measure. For example, organizations often fund learning initiatives based on the goal of improving the productivity of their workers. Because it is difficult to estimate the impact of a training course on people's productivity, many corporate learning departments simply report the number of hours employees spend in the classroom. A program that manages to get 80% of employees to spend 40 hours in class isn't necessarily providing the best service to the company. Seeking means rather than ends leads to decision errors when the selected means is only a characteristic of the desired end, not the cause of it. With regard to choosing projects, the end goal is to produce the greatest possible value for the organization, subject to the constraint on available resources. Because value is difficult to measure (see Part 3), a popular heuristic is to prioritize projects based on strategic alignment—projects are ranked based on how well they fit elements of stated corporate strategy. Translating strategy to action is important, however, being well-linked to an element of strategy doesn't guarantee that a project will be successful or that it will generate the most value for the organization. IncrementalismIncrementalism is an approach to decision making wherein any large change is made slowly, though a series of small adjustments. The idea is to be cautious, to experiment and learn. For example, an organization might avoid a high-risk, big investment decision by making a series of small investments. The first step might be to conduct a low-cost, low-risk pilot project. If the pilot appears successful, a bolder move might then be taken. Or, an expanded pilot might come next. Home Depot, for example, reportedly uses this approach. The company's policy is to test proposed changes to retail strategy in individual stores before making any large-scale changes. A major advantage of incrementalism is that it preserves flexibility while providing useful information. However, there are two potential problems. One is that experimenting takes time, and the window of opportunity may close before the organization is prepared to fully act. Another problem relates to sunk cost bias. It may be hard to abandon a plan as costs accumulate because decision makers don't want to admit that earlier investments were "wasted." Over-Reliance on ExpertsBecause decisions often involve complex technical considerations, experts frequently play a necessary role in decision making. Experts have credibility and command respect from others, both inside and outside the organization. There can be problems, however, with relying on experts. Experts can easily dominate discussion and discourage constructive dissent. Over-reliance on experts can create bad choices. Experts may be biased towards solutions that rely more heavily on technology, and they may not fully understand important non-technical considerations that impact the decision. The Bush Administration, for example, has been criticized for relying too much on experts in the Central Intelligence Agency in its decision to take down the government of Iraq. Due to the risks associated with using decision-making heuristics, you should:
Decision ErrorsFigure 5 shows the 3 essential steps to benefiting from decisions: (1) recognize the opportunity to choose, (2) make a good choice, and (3) implement.  Figure 5: Essential steps for benefiting from decisions. Missing the opportunity to make a decision means that the "do nothing" or status quo option is chosen by default. Warren Buffet has reportedly said that he considers his worst investment failures to be missed opportunities to take action, "The things I could have done but didn't do have cost us billions of dollars" [7]. Taking advantage of an opportunity to decide doesn't, of course, ensure success. There are many reasons why a conscious business choice may be poor, including misinterpreting the problem to be solved (poor framing), failing to identify good alternatives, not being clear about objectives, and using heuristics or unaided intuition rather than reasoned logic. Finally, there is nothing to be gained from making a good choice if it is not implemented. A study by an Ohio State University researcher found that about one-third of nearly 400 business decisions studied were never implemented by the organizations involved. [8] It is often assumed that a bad decision will be evident to us after the fact. However, this is not necessarily the case. In one experiment, researchers used a card trick. They showed participants pairs of pictures of female faces and asked them to choose the face they thought more attractive. Later, they switched some of the cards and asked the participants to explain their choices. In the majority of cases where the cards were switched, participants failed to recognize the switch—they simply justified the choices they thought they had made. [9] To benefit from the power to decide, be sure to:
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Estimating and Forecasting Biases