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Managers
and entrepreneurs face high-stakes decisions throughout
their careers. Should they pursue a new market? Enter
into a joint venture? Make a high-profile hire? When so
much is unknown and unknowable, conventional wisdom says
to go with your gut.
Harvard Business
School
professor Max H. Bazerman strongly disagrees. Here, the
author of Judgment in Managerial Decision Making
(sixth edition, Wiley & Sons, 2005) explains why the
worst time to rely on your intuition is when you’re
making high-stakes decisions.
Many
managers and executives, especially entrepreneurial
types, put a lot of credence on their gut. Stories
abound about the entrepreneur who decided to start a
business that everyone around him said would never fly,
and fly it did.
Yes,
people do hear those stories, because they make the
news. But the vast majority of new businesses fail, and
most of them shouldn’t have been started in the first
place. Our gut makes us more vulnerable to cognitive
biases such as overconfidence.
You see
this all the time in the realm of investments. An
individual investor is convinced that he has the
instincts to sniff out the right stock or fund and buy
it at the right time. But very few people can do this
with any consistency. He should get his asset allocation
right, buy index funds and spend his time more
productively—he’d be better off.
Can you
ever entirely free yourself from cognitive biases?
No, not
entirely, but you can do a lot to mitigate their
effects. Every scientific test of intuition shows that
it’s profoundly affected by cognitive biases. When you
decide to rely on your gut, you’re deciding to let those
biases run amok. And that’s the last thing you want to
do when the decision really matters.
Say an
executive is contemplating having his company enter into
a joint venture. There’s lots of data on the table, but
of course the outcome of the deal simply can’t be known.
Wouldn’t this be a time that the business instincts the
executive has developed over the years could be helpful
in deciding whether to go forward and under what
conditions?
No,
absolutely not. His so-called business instincts are
likely to be swayed by another cognitive bias, the
anchoring bias. Anchoring describes the mind’s tendency
to anchor judgments irrationally against a piece of data
or information that may or may not be relevant. Say the
last joint venture the company entered turned out well.
That fact will anchor the executive’s decision, even if
that joint venture was entirely different than the one
currently on the table.
What
other cognitive biases lead to flawed decisions?
Another
common one is the vivid data bias, which describes our
tendency to overweight information that we recently
received or that stands out for some reason.
Say a
manager wants to hire a real superstar for a new
high-profile position in her department. One of the
candidates she’s assessing has one amazing success to
his credit, but except for that his résumé is pretty
ho-hum. The manager deciding whether to hire him is
likely to be influenced by the success and to
underweight the rest of the evidence on the résumé.
So when
the stakes are high and so much is unknown, what should
managers do to make the best possible decision?
The work
that researchers Keith Stanovich and Richard F. West
have done is very helpful here. They make a distinction
between what they call System 1 and System 2 thinking.
System 1 thinking is quick, automatic and intuitive;
System 2 thinking is more deliberate and logical, and
offers a structured approach to problem solving.
In
high-stakes situations, managers should consciously
engage in System 2 thinking. This means stepping back
from the situation and assessing it as if you were an
outsider. You might want to ask people whose wisdom and
judgment you respect to look at it and share their
observations and recommendations with you. Another
helpful tactic is to map out pros and cons, assign them
weights, and use a decision matrix to guide your
thinking.
If
you’re considering whether you should spend $40 on a
flea-market purchase, let your intuition run wild. But
when you’re making important decisions, you need to
check your intuition with very careful analysis.
■ Christina Bielaszka-Duvernay is the editor of Harvard
Management Update. |
