Ahhh, fall … time for the season we’ve been anticipating since January. There’s just the slightest hint of a break from the sweltering summer heat. It’s a time when your team is again undefeated, energized and feeling ready for all challenges. Let the games begin!
You weren’t thinking about football, were you? No, it’s time for the really big game: planning and budgeting for 2008. (OK, while strategic planning lacks the pageantry and immediate gratification of Razorback games, it can involve a similar degree of excitement, fear and over-consumption.)
Much as a coach should have a good understanding of his team’s weaknesses so that he can plan strategies to get around them, you can recognize your team’s inherent weaknesses in making strategic decisions.
The TV ads for a brand of credit cards pose the question, “What’s in your wallet?” Let’s stipulate that your team – like any team – will bring a lot of baggage (far bigger than a wallet) to the upcoming planning season.
The fact is that every individual brings to the group process some baggage in the form of biases and distortions. None of us is wired or socialized to be a completely cool, objective evaluator of imperfect or conflicting bits of information.
Although everyone is a bit different, there are nevertheless a few common biases that almost any human being carries around to some degree. Compounded across individuals, the impact of these biases on strategic planning and budgeting teams in the arena of business – very social and human processes – is thus enormous. If you can recognize ahead of time the ways such biases can skewer and devour your planning processes and results, then you and your management colleagues stand a very good chance of doing a better job than your competitors.
Two of the most powerful biases in judgment might appear to be opposite ingredients that, when combined in the boiling pot of a large-scale planning process, might cancel each other out. The more common outcome is that these biases work in different ways at different decision points in the typical planning process. Sometimes, they might even combine for a nasty and destructive interaction.
The first big bias to understand is over-optimism. Business leaders, being human and all, tend to overestimate the likelihood of positive outcomes from their decisions. The unseen lever that pushes that bias is overconfidence. We can see this overconfidence in many arenas. For example, a host of surveys reveals that most Americans believe they are in the top fifth of the population in a range of skills from driving to stock-picking. (Even Garrison Keillor’s fictional Lake Wobegon is full of children who are “all above average.”)
Over-optimism is most pronounced when there is little data or precedent to rein it in. Therefore, if your team is planning into relatively unknown territory, your team should consider the use of case studies, decision trees with specific probabilities assigned or any other tools that will make everyone consider future challenges with a clearer eye.
The second big piece of cognitive baggage to understand is improper loss aversion, or the assignment of more value to potential losses than to potential gains. This bias mangles strategic decision-making by freezing executives into a state of inaction, even when the risks involved in a decision are objectively acceptable.
Perhaps surprisingly, loss aversion doesn’t rear its head as often for the really big, expensive and risky decisions. (In those cases, over-optimism from the company’s leadership tends to kick in.) Rather, it’s the small to medium stuff such as brand extensions, minor product launches or smaller acquisition decisions that suffer most.
People often get stuck in loss aversion because they naturally consider each option as an uncomfortable change from a known status quo. A better way to evaluate options – and blunt the impact of loss aversion – is to consider each risky decision not in isolation but as one of many risky decisions to be made over the course of time (a portfolio, if you will).
I would be interested to read your thoughts on these decision biases and how your organization works to keep the baggage light.
(Jim Karrh, Ph.D., is chief marketing officer of Mountain Valley Spring Co. of Hot Springs.)