Posts Tagged ‘decision-making’

Decision-making incorporating behavioral economics

April 15, 2013

Vienna Debate Workshop-Finale

The McKinsey quarterly delivers the goods once again. Check out Allen Webb’s article based on his interview with Chip Heath and Olivier Sibony. Read the article and sign up for the newsletter. There is the occasional business jargony fluff piece, but there are also enough gems to make it worth tolerating the daily emails.

About the only thing that we disagree on is the need for more debate to make better decisions. In theory, I guess debating would help. However, one of the dynamics that they miss is that debate generally entails people with their mind already made up, squaring off with each other in an effort to make themselves look smarter than their counterpart. No one really ‘wins’ a corporate debate…the team with more power – whether formal or informal – gets their way. Debating also represents a gamble on the part of the more junior person. No matter what they say, there are many people who feel, at a visceral level, that debate equates to disloyalty. If you are the junior guy or gal, there is nothing in it for you to risk that the more senior personnel in the room are not That Guy. If you really want a better decision, aggregate independently-formed viewpoints.

Having picked apart the article, however, the point above is the only one with which I can find fault. It was especially helpful for the pointers on approaching people about improving their decision-making…or negotiation skills. I.e. no matter how obvious it is to those of us in the know, one cannot directly tell people they are biased and expect to sell them something. (getting nervous and starting to tremble) .

These guys actually won me over with their clear disdain for bureaucracy and slowness…even pointing out that the word ‘process’ conjures up painful connotations. They continued their courtship with examples of the confirmation bias…one that is almost impossible to miss once you understand it. Finally they sealed the deal with their emphasis on experimentation – i.e. getting back to reality.

If they would have spoken about prediction markets, they would have had an expedited selection to the TPS Report’s Hall of Fame. You know, if that existed.

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Taleb, Kahneman, and…Rajakovich?

April 4, 2013

Ok, so the headline might be a bit deceptive. I was not actually, physically present

Nassim Nicholas Taleb

when these two scholars met. But if we take the meta-universe as our context, then I could…oh, I’ll just move along.

Check out this discussion between Daniel Kahneman and Nassim Nicholas Taleb. Trying to summarize an 80-minute discussion would make me an even larger fool of randomness than I was before, so I’ll just subject you to some of it instead! Cha-ching.

A key point of the discussion centered around the following theme: Size means fragility. In percentage terms, the larger the project, the greater the overruns; the larger the organization, the more susceptible they are to risk of bankruptcy; generally, the greater the degree of centralization, the more susceptible we are to extreme negative outcomes.

Most people will understand this point at some level. Taleb used the example of government, the economy, and large banks. I’ll use the example of decision-making in just about any context. Where one person or a small group of people make decisions from on high without a very good knowledge of the details of a situation, they may make small gains in terms of continuity. They may also cause large problems.

The effect is even worse when the person or group is focused on things that will have little impact, instead of those that will have a large one.

The week in review March 22

March 22, 2013
  • The Hub Of All Things is definitely something to keep your eye on. I probably would not do it justice here, so just click the link. There will still be a roach problem festering in storage B when you get back.
  • Procurement really needs to become collaborators and recognize the potential for co-creating value with suppliers if we are to grow our role within the business. Too often, the old-school suspicion of anything new (person, idea etc.) holds us back.
  • Check out this interview with Francesca Gino – author of Sidetracked: Why Our Decisions Get Derailed, and How We Can Stick to the Plan. She has done lots of good primary research on decision-making and where we go wrong. I have personally witnessed sub-optimal decisions made because one party knows that the other party (normally the less intelligent or less informed) will become angry if the decision is not what he/she wants.
  • Cyprus…wow…what can you even really say? Since the trouble with banks has been brewing for years (according to this WSJ article by Charles Forelle, Matina Stevis, and David Enrich), we have to wonder why it had to come to this point. Increasing taxes would make people grumble, but taking a 10-12% chunk all at once is about as psychologically damaging as you can get. The only worse way to handle it is to force people to withdraw cash then grab it out of their hands. I’ve spoken to two Cypriots, and they are not happy. I’m guessing the other 80% of the population isn’t either.
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Procurement governance – not as painful as it sounds

February 28, 2013
HONDA CB750. 1969-2003. 750cc FOUR CYLINDER.

HONDA CB750. 1969-2003. 750cc FOUR CYLINDER. (Photo credit: ronsaunders47)

 

I have been thinking lately – yes, yes, the fire department has been notified – about procurement governance. It then follows that neither you nor I will have trouble sleeping tonight.

 

Since I won’t be writing a textbook on the subject, I’ll just pick two items that I think should be considered that, in many cases, are not.

 

  • The Decision-making process – Often, the process for making-decisions is an afterthought. The person or small group that makes decisions assumes that he/she/they accurately represent what is A). Right or B). The will of the group around them. However, ask Loewenstein, Surowiecki, Taleb, or J.S. Armstrong how that generally works out. Two words “Sub” + “Optimal”. Say them together now. Good.
  • Emergent Strategy – I love creating and building systems. It feels like we are being scientific, even though business can only uneasily borrow concepts from our more systematic brothers and sisters.  It feels like we can build a system that, if everyone just performs their role, will work brilliantly. And again, we’ll be….well, right! The problem is that reality has no particular interest in our feelings, and that some of the best strategies emerge from the ground up. Soichiro Honda, can you hear me? Giving people the skills and knowledge to think creatively, and then empowering them to take advantage of opportunities should be part of our approach to governance. My own tendency is to go all out on the rational planning thing, but knowledge and experience tells a different tale.

 

Go forth and do great things.

 

 

Related articles

 

The attribution bias

July 31, 2012
English: Normal distribution with bias

English: Normal distribution with bias (Photo credit: Wikipedia)

“The word of the day is ‘job’ – J-O-B…you gonna look for a job today!” With a nod the dad in Friday, we begin today with the bias of the week – the attribution bias. Don’t be that guy. However, if you are that guy, it may be outside the scope of your abilities to change. (Yeeeaaah?)

The attribution bias is a good time…it goes something like this:

  1. “My negotiation went well because I really held firm” and “Your negotiation went well because circumstances were in your favor.”
  2. “My project is not on time because this person could not deliver her part, and we did not get funding, and…” and “Your project is not on time because you simply did not get the job done.”
  3. “The sale happened because of the previous work I did with client X, and I really won them over with my pitch” and “Your sale happened because our company had the best product offering.”

We are all subject to it, but for the sake of those who must needlessly waste energy rolling their eyes, understand that it is out there. Resist the urge to think you have really looked at the situation objectively. You haven’t. In fact, your mind is specifically designed to ensure that you have not looked at the situation objectively.

NFL labor negotiations and last minute tricks

July 31, 2011
A photo of the Logo of the National Football L...

Image via Wikipedia

There is some debate amongst negotiators whether we should be doing things like slipping in last minute terms when it looks as if an agreement is about to be concluded. The thinking is that the other side won’t hold up a final agreement just to negotiate a small issue.

Generally, we at TPS report believe that these sort of tactics lead to a breakdown of trust, and should be used sparingly, if at all. We also believe that if they are to be used, it must be in a situation when all that is required is a one-time result rather than an ongoing business relationship.

We saw these tactics play out on a grand scale with the end of the NFL lockout. The owners, according to Mike Florio at PFT.com, may have attempted to slip terms into the final agreement without the players noticing. At the very least, they voted to approve an agreement that wasn’t completely, you know, approved by the players.

The move may have been an attempt to build public pressure on the players to approve a deal they did not have time to fully digest.

Then, there was a bit of an issue around the process for re-certifying the NFL Players Association. After a bit of shenanigans on the owners side, there was apparently some concern that the players would respond in kind. Once the deal was approved by the owners, they needed the players to re-certify their union.

If the union did not re-certify, owners would be liable to anti-trust litigation since federal law generally frowns upon collusion amongst employers to hold down labor costs. Since the re-certification would not happen until after the agreement, in theory, players would have a short window in which they could sue. Or a longer one if they did not agree to join the re-certified union.

In the end, it all worked out and there will be football. However, with players and owners sharing revenue, they are a model of what should be a collaborative relationship. It was in both parties’ interests to work together to maximize revenue, yet they still lost the Hall of Fame preseason game to delays in finalizing the deal. They both did everything they could to build leverage throughout the process, including the threat of and initiation of legal action.

So, my takeaways from this include a question and a couple observations:

  1. Is it possible to have a truly win-win attitude in a negotiation, or is it more like WIN-win?
  2. I had to chuckle to myself when people would say things like “they have to do a deal, both sides stand to lose so much.” Those in the know understand that rationality has only a small place, if any, in our decision-making.
  3. Building on the previous point, there are some people who are better at making their decisions sound rational than others. There are some people whose words are so divorced from what they do and from reality that when they speak, it is hard to contain a sly smile. Or is that just me?

As always, we would love to hear your comments.

Reigning in Gulliver’s travels

May 26, 2011

I completely and totally apologize for the title of this blog post. It’s like there is some kind of cosmic force forcing bloggers and journalists to write painfully cheesy headlines.

Stuart Gulliver, the new CEO of HSBC banks has decided to pull back on the aggressive global expansion of the retail portion of the bank over the last few years. Check out the full story here if you have a WSJ subscription. The story is not particularly interesting except when you take a broader view of executive decision-making. One day, a chief exec can make a very convincing argument for one strategy, and a couple months or years later, another can make an equally convincing argument for the complete opposite strategy. It’s all enough to make one hit up Amazon.com and pick up a copy of Carneades. Or maybe that’s just me.

Of course, I can’t actually blame HSBC for what it did or for its current course correction. How could it predict a 17% default rate on Mexican credit cards? My guess is that we won’t be hearing too much about micro-loan schemes in Vietnam for the next couple years either…

There really is no major life lesson in this post. In terms of strategy, my thoughts are that a tipping point of information must be considered followed by an aggressive implementation. The true test of an executive team is the courage to reverse course when it turns out that reality conflicts with one’s own conception of it.

Stay tuned for an upcoming post on the world of travel search. I promise to make it more fun than it sounds…its on hold now because the day job’s got me so worn out that writing a post that actually requires thought just isn’t happening today.


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