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16 Dec 2010

Accounting for Unconscious Biases in Your Decision Making?

The article, The Case for Behavioral Strategy, (PDF) by Dan Lovallo and Olivier Sibony* from the March 2010 McKinsey Quarterly states:

Once heretical, behavioral economics is now mainstream. . . . Yet very few corporate strategists making important decisions consciously take into account the cognitive biases—systematic tendencies to deviate from rational calculations—revealed by behavioral economics. . . . in strategic decision making leaders need to recognize their own biases.

As I pointed out in my postings regarding the difference between leadership and management and confidence as an indicator of incompetence, advancements in technology and research methodologies are increasingly showing the influence of unconscious biases in our decisions. Our unawareness encourages substandard decisions. Learning our biases and accounting for them is important. Here are a few common biases mentioned in this article:

  • Believing good analysis by managers with good judgment will automatically lead to good decisions
  • Over-weighting recent or highly memorable events
  • Clinging to a formed hypothesis even when there is evidence disproving it
  • Taking actions prompted by excessive optimism and overestimation of our abilities
  • Endorsing projects proposed by confident advocates over those who identify all the risks and uncertainties
  • Over-weighting last year’s numbers in budget reviews
  • Feeling losses more intensely than equivalent gains
  • Underestimating the influence a person’s self-interest has in his determination of what’s best for the group
  • Conforming to the dominant views of the group or its leader

Among the article’s solutions were:

  • Establish formal decision making processes
  • Take a different perspective and form alternative hypotheses around it
  • Examine at least six similar experiences, not just one or two
  • Identify uncertainties and unknowns in planning
  • Redo budgets from scratch rather than from last year
  • Encourage diversity and dissent

*Olivier Sibony is a director in McKinsey’s Brussels office.

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