The Big Idea: Before You Make That Big Decision…
Reprint: R1106B
When an executive makes a big bet, he or she typically relies on the judgment of a team that has put together a proposal for a strategic course of action. After all, the team will have delved into the pros and cons much more deeply than the executive has time to do. The problem is, biases invariably creep into any team’s reasoning—and often dangerously distort its thinking. A team that has fallen in love with its recommendation, for instance, may subconsciously dismiss evidence that contradicts its theories, give far too much weight to one piece of data, or make faulty comparisons to another business case.
That’s why, with important decisions, executives need to conduct a careful review not only of the content of recommendations but of the recommendation process. To that end, the authors—Kahneman, who won a Nobel Prize in economics for his work on cognitive biases; Lovallo of the University of Sydney; and Sibony of McKinsey—have put together a 12-question checklist intended to unearth and neutralize defects in teams’ thinking. These questions help leaders examine whether a team has explored alternatives appropriately, gathered all the right information, and used well-grounded numbers to support its case. They also highlight considerations such as whether the team might be unduly influenced by self-interest, overconfidence, or attachment to past decisions.
By using this practical tool, executives will build decision processes over time that reduce the effects of biases and upgrade the quality of decisions their organizations make. The payoffs can be significant: A recent McKinsey study of more than 1,000 business investments, for instance, showed that when companies worked to reduce the effects of bias, they raised their returns on investment by seven percentage points.
Executives need to realize that the judgment of even highly experienced, superbly competent managers can be fallible. A disciplined decision-making process, not individual genius, is the key to good strategy.
The Idea in Brief
When executives make big strategic bets, they typically depend on the judgment of their teams to a significant extent.
The people recommending a course of action will have delved more deeply into the proposal than the executive has time to do.
Inevitably, lapses in judgment creep into the recommending team’s decision-making process (because its members fell in love with a deal, say, or are making a faulty comparison to an earlier business case).
This article poses 12 questions that will help executives vet the quality of decisions and think through not just the content of the proposals they review but the biases that may have distorted the reasoning of the people who created them.
Thanks to a slew of popular new books, many executives today realize how biases can distort reasoning in business. Confirmation bias, for instance, leads people to ignore evidence that contradicts their preconceived notions. Anchoring causes them to weigh one piece of information too heavily in making decisions; loss aversion makes them too cautious. In our experience, however, awareness of the effects of biases has done little to improve the quality of business decisions at either the individual or the organizational level.
Daniel Kahneman is the Eugene Higgins Professor of Psychology Emeritus at Princeton University. He was awarded the Nobel Prize in Economic Sciences in 2002 for his work (with Amos Tversky) on cognitive biases.
Dan Lovallo is a professor of business strategy at the University of Sydney and a senior adviser to McKinsey & Company.
Olivier Sibony (olivier_sibony@mckinsey.com) is a director in the Paris office of McKinsey & Company.
The Big Idea: Before You Make That Big Decision…
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