Decision Making

for

Business Leaders

David WanetickManaging Director IncreMental Advantage

Business Leaders

The contents of this presentation are the property of IncreMental Advantage. Reproduction of this presentation in whole Reproduction of this presentation in whole or in part is prohibited except with the express written consent of IncreMental Advantage.

I. Generalities about Decision MakingII. Running MeetingsIII. Integrative ThinkingIV. Common Mistakes in Decision MakingV. Steps to Making Better Decision

Agenda

V. Steps to Making Better Decision

A. Devil’s Advocate Program

B. Predictive Markets

VI. Exercises

� Decisions are processes not events

� There are typically multiple decision makers, not one decision maker

� Decisions are made anytime two people talk, not in an isolated room

� There are social pressures, politics, lobbying, coalition building—decisions are not just intellectual exercises

� Managers analyze then decide–decision making is not linear, sometimes there are solutions searching for linear, sometimes there are solutions searching for problems to solve

� Managers decide and then act–there is an iterative process of deciding and acting

� One decision meetings – Gordon Binder of Amgen

� Do not postpone meetings when someone is unavailable

� Invite subordinates – opportunity for them to prove themselves

� Giuliani – commissioners could not blame subordinates

� Supreme Court – spar with law clerks; discuss issues with parties; when in chambers with just the justices, everyone speaks once before anyone speaks twice

� Make your meetings more efficient

� First Decision Effect

� Distribute an agenda in advance

� Meetings should have agendas, and the agendas should specifically request individual reports

� Schedule meetings in close proximity to one another

� No notes during meetings of extreme importance - Jobs

� Calculate the cost of each minute

� Make everyone stand – University of Missouri report claimed that these meetings are 34% more efficient

� Meet for breakfast

▪ Less risk of cancellation; customer is alert; less expensive; menu is

simple; saves customer time in commuting

� One remarkable recent study found that self-made millionaires are four times more likely than the rest of the population to be dyslexic.

� Dyslexics struggle with L-Directed Thinking and the linear, sequential, alphabetic reasoning at its core. sequential, alphabetic reasoning at its core.

� Dyslexics include:▪ Charles Schwab / Richard Branson / Pablo Picaso / Leonardo Da Vinci /

▪ Thomas Edison / Tommy Hilfiger / Andy Warhol

� Theory of Israeli success

� Salience - Welcome complexity because the best answers arise from complexity.

� Causality - Don’t flinch from considering multidirectional and nonlinear casual relationships.and nonlinear casual relationships.

� Architecture - Integrative thinkers don’t break a problem into independent pieces and work on each piece separately.

� Resolution - Always search for creative resolution of tensions, rather than accept unpleasant tradeoffs.

� Break the Rules / Models

� Whatever models exist at the present moment do not represent reality; they are simply the best or only constructions yet made.

� Conflicting models, styles, and approaches to problems are to be leveraged, not feared. leveraged, not feared.

� Better models exist that are not yet seen.

� Not only does a better model exist, but that they are capable of bringing that better model from abstract hypothesis to concrete reality.

� Be comfortable wading into complexity to ferret out a new and better model. Be confident that you will emerge on the other side with the resolution they seek.

� Give yourself the time to create a better model.

� Ego

� Egocentrism

� Yes-Men� Yes-Men

� Confirmation Bias

� Automatic tendency to notice data that fit with our beliefs.

� Framing / Anchoring Bias

� Groupthink

� The bonds of teamwork can make it hard to deliver tough news.

� Teams tend to be formed of people who resemble each other in many ways, and they become friends. You don’t want to tell your many ways, and they become friends. You don’t want to tell your friend he has messed up.

� Faultlines – schisms that emerge because of demographics of participants (engineers vs. marketing professionals); in-group / out-group

� Inability to manage airtime - a few people dominate the group –hierarchy, status

� Free-riding – some people do not want person accountability associated with making decisions

▪ Incentive to combat – ask people to rate the contributions of other people on the team – each person has 100 points to allocateallocate

� Groupthink

� Too much focus on common (shared) information, not on (private) information held by a one or a few members – lack of adequate information sharing; perhaps the bearer of the private information incurs some social costs such as the necessity of establishing the relevance and credibility of the unique information

� Warning Signs of Groupthink

� Are management teams more polite or offer a chance to debate?

� Do subordinates wait to take their verbal and visual cues from the leader before commenting on controversial issues?leader before commenting on controversial issues?

� Are planning sessions primarily about presentation of strategy or a lively dialogue about what the plans and strategies should be?

� Do the same people tend to dominate management meetings?

� Warning Signs of Groupthink

� Is it rare for the leader to hear concerns or feedback directly from those several layers below in the organization?

� Are meetings used to ratify decisions that have already been made � Are meetings used to ratify decisions that have already been made or to debate new issues?

� Are people highly concerned about protocol when communicating with people at different levels of the organization?

� Viciousness of attacks when people don’t agree with you.

� Barriers to Candid Dialogue

� Structural complexity

� People’s roles are ambiguous

� Homogenous groups

� Large status differences in status among team members

� Leaders who present themselves as infallible

� Preventing Groupthink

� Leader does not have to attend every meeting.

� A more neutral setting for the meetings – without trappings of the power of the leader – is good. power of the leader – is good.

� Dividing advisors into a few subgroups that would meet separately.

� Have a Devil’s Advocate.

� Discuss multiple alternatives.

� Preventing Groupthink

� Testing of assumptions.

� Vigorous debate.

� People participating in decision making should look at the big picture – write the speech for the leader.

� No deference to specialists, generalists can challenge specialists.

� Access to lower level officials.

� Outside unbiased experts will be brought in.

� Stimulating Conflict and Debate - Techniques for Inducing Conflict

� Role playing competition – scout teams in football – you can learn what and how the other side thinks of you

� Think about what new leaders would think and do about a situation –Intel – no emotional involvement or sunk costs, much more objective

� Mental simulation - Scenario planning – pre-mortem analysis

� Stimulating Conflict and Debate - Techniques for Inducing Conflict

� New conceptual models or frameworks - Have an expert discuss some possible models to benchmark against – this way the team has specific issues to discusshas specific issues to discuss

� Point / Counterpoint Methods – use subgroups or devil’s advocates – dialectical inquiry (exploring clashing dialogues) – Polycom has red and blue teams that gives the pros and cons of doing acquisitions – Electronic Arts – the producer ensures game quality and the development director focuses on project management, budget, schedule, on-time deliverability – conflict is built into the structure

� Availability Bias

� Focusing Illusion

� Shows how easy it is to manipulate people simply by directing � Shows how easy it is to manipulate people simply by directing their attention to one bit of information or another.

� College students were asked – How happy are you with your life in general? And How many dates did you have last month?

� Rear View Mirror Effect

� Illusory Correlation� We sometimes jump to conclusions about the relationship

between two variables when no relationship exists.

� Questionable Cause / Casual Fallacies / Illusory Correlation

� Post hoc ergo propter hoc - after this, therefore because of this

▪ First event doesn’t always cause the second event

▪ If a new tenant moves into an apartment, and the furnace suddenly breaks, it doesn’t mean that the new tenant broke the furnace

� Cum hoc ergo propter hoc - with this, therefore because of this

▪ Correlation is not the same as causation

� Fundamental Attribution Error

� Bad events are the results of external factors, good events are a result of our decisions

� When making judgments, we tend to over-attribute personal factors and under-attribute situational forces. People default to the individual as cause, instead of the situation as cause.

▪ Experiment with Priests at Yale Seminary

� Prospect Theory

� People are about twice as loss averse as they are desirous of making gains. When in a losing situation we take more risks. When in a winning situation, we are more cautious.

� Experiment – Auction a $20 bill – Rule 1: Bids are to be made in $1 increments; Rule 2 – The winner of the auction wins the $20 bill. The runner-up must still honor his or her bid, while receiving nothing in return. The second best finishes last.

� In a simple experiment, a group of people were told to imagine that they had $300.

� They were then given a choice between (a) receiving another $100 or (b) tossing a coin, where if they won they got $200 and if they lost they got nothing. Most of us, it turns out, prefer (a) to (b).

� But then Kahneman and Tversky did a second experiment. They � But then Kahneman and Tversky did a second experiment. They told people to imagine that they had $500 and then asked them if they would rather (c) give up $100 or (d) toss a coin and pay $200 if they lost and nothing at all if they won. Most of us now prefer (d) to (c).

� What is interesting about those four choices is that, from a probabilistic standpoint, they are identical. Nonetheless, we have strong preferences among them. Why? Because we’re more willing to gamble when it comes to losses, but are risk averse when it comes to our gains.

� Munchausen Management Syndrome

� The Delusion of Single Explanations

� The Delusion of Rigorous ResearchThe Delusion of Rigorous Research

� The Delusion of Organizational Physics

� The Delusion of Absolute Performance

� K-Mart v. WalMart

� Ex-Post Facto Selection

� Suppose we want to find out what leads to high blood pressure. We’ll never find out if only examine patients who suffer from high blood pressure; we’ll only know if we compare them to a sample of people who don’t have high blood pressure.of people who don’t have high blood pressure.

� Carryover Coalitions

� Special Pleading

� Involves someone attempting to cite something as an exemption to a generally accepted rule, principle, etc. without justifying the exemption.

� Winner’s Curse

� The winner overpays during bidding.

� Oversimplification of Pareto’s Paradox

� Representative Bias� This is the automatic tendency to compare something with what

you already know, even when it is not an appropriate analogy.

� Unchecked Consistency Error

� Planning Fallacy� The systemic tendency toward unrealistic optimism about the

time it takes to complete projects.

� Illusion of Control

� People think they’re more likely to win the lottery if they pick their own numbers. They also think they’ll do better in a game of chance if they throw the dice themselves. Air travel (no control) is safer than driving (control).safer than driving (control).

� One manifestation of that illusion occurs when an organization experiences a period of improvement or failure and then readily attributes it not to the myriad of circumstances constituting the state of the organization as a whole and to luck but to the person at the top.

� Fallacy of the False Dilemma.

� Self-Sealing Argument – No True Scotsman

� The meaning of a term is redefined to make a desired assertion about it true.

� Regression Fallacy� Regression Fallacy

� Failing to account for natural fluctuations. Feel better after seeing the doctor.

� Status Quo Bias

� Accepting the status quo or default option since it takes effort to choose something other than the default. People think defaults carry an implicit endorsement from the default setter.

� Gambler’s Fallacy

� The idea that the odds of an event with a fixed probability increase or decrease depending on recent occurrences of the event.

� Sharpshooter Effect

� Noticing cancer in an area and then defining the area.

� Normal Accident Theory

� In some complex organizations, accidents are unavoidable.

� Non-Action Bias

� In a study of hypothetical vaccination decisions, participants expressed an unwillingness to vaccinate children against a disease that was expected to kill 10 out of 10,000 children when the vaccine itself would kill 5 out of 10,000 through side effects. the vaccine itself would kill 5 out of 10,000 through side effects. People would not accept any deaths from the “commission” of vaccinating―even when their decision would cause five additional deaths.

� Motivated Reasoning

� Our tendency to accept what we wish to believe (what we are motivated to believe) with much less scrutiny than what we don’t want to believe.

� Cognitive Dissonance

� The tension we feel when we realize that two or more of our beliefs are in conflict.

� Overconfidence Bias

� The belief that past success will lead to future success.� The belief that past success will lead to future success.

� Increases as people are more knowledgeable about a subject.

� Firefighters who underwent error-based training showed improved judgment and were able to think more adaptively than those who underwent the error-free training; proof-reading / quality control

� Signal-to-Noise Problem� Analysts are initially overreactive – set off false alarms – cause

fatigue on the part of other members – become underreactive

� Reductionist Thinking

� Can’t just look at the whole as the sum of its parts – the interaction of the factors have properties of their own.

� Herding / Self-Herding� Herding / Self-Herding

� Happens when we assume that something is good or bad on the basis of other people’s previous behavior.

� Diagnosis Bias

� The moment we label a person or a situation, we put on blinders to all evidence that contradicts our diagnosis.

� Value Attribution

� Tendency to imbue someone or something with certain qualities based on perceived value rather than on objective data.

� The Halo Effect� The Halo Effect� When we have positive feelings toward a given person in one

respect, we tend to automatically generalize that positive regard to other traits.

� Conjunction Fallacy

� The first law of probability – the probability that two events will both occur can never be greater than the probability that each will occur individually.

� Linda is thirty-one years old, single, outspoken, and very bright. In college she majored in philosophy. While a student she was deeply concerned with discrimination and social justice and participated in antinuclear demonstrations.demonstrations.

Which of the following statements is more probable?

� Linda is a bank teller and is active in the feminist movement.

� Linda is a bank teller.

� Premature Closure

� People home in on an answer prematurely, long before they evaluate all of the information

� Survivorship Bias

� Means that we remember what happened; we don’t remember what didn’t happen – don’t read about people who were not cured

� Optimistic Bias� Psychologists have found that the optimistic bias seems stronger

in situations we can control; one study found drivers were more optimistic than passengers when asked to rate their chances of being involved in a car accident.

� Hawthorne Effect

� Says that people in an experiment change their behavior simply because they know they are in an experiment.

� Baker’s Law

� People tend to explain their behavior by reporting circumstances of lowest culpability compatible with credibility.

� Inattentional Blindness

� In this condition it is possible for a person to look directly at something and still not see it. Our expectations and knowledge of what’s in a scene influence what we see in a scene.

� The Heisenberg Principle

� If you look at a situation and announce and tell people about it, it has an effect.

� Shreckenberg’s Self-Destroying Prognosis

� The correct prediction must take into account how people are going to respond to the prediction.

� Narrative Fallacy

� The tendency to construct stories to explain events, even when no story exists. (e.g. Michael Dell)

� The Peltzman Effect / Risk Homeostasis / Risk Compensation� A study in Finland that found that adding reflector posts to a

curved road resulted in higher speeds and more accidents than when there were no posts.

� Climbers on Mt. McKinley� Climbers on Mt. McKinley

� Parachutists – using the rip cord

� Pilots overshooting Minneapolis by 150 miles

� Selective Recruitment� Those least at risk are most likely to adopt safety measures most

rapidly.

� Hidden Agendas

� Presumed Association Bias

� Claims that when we are asked whether there is an association between two things, we look for situations where there is an association more than we look for situations where there is no association. As a result, we can overestimate how associated the association. As a result, we can overestimate how associated the two things are.

� Reference Group Neglect

� Competitors often fail to assess the strength of their competition when deciding whether to enter a market.

� Problems with Analogies

� Staples – dry cleaners – same founders – both markets fragmented, centralized model

� Pete’s Wicked Ale – tried to go into specialty chocolate - different � Pete’s Wicked Ale – tried to go into specialty chocolate - different customers, no excess capacity at larger chocolate producers

� Enron had its templates – rewarded managers to find new markets - only focused on similarities, not on dissimilarities

� Enron’s Questions Were

� Was the product a fungible commodity that could be divided into indistinguishable units?

� Did it have a complex and unique logistics system?

� Were there many buyers and sellers that lacked market power?

� Could one create standard contracts and product offerings?

� Problems with Analogies

▪ Quaker’s acquisition of Snapple.

▪ In 1994, Quaker was led by CEO William D. Smithburg since 1981. Smithburg decided to acquire Snapple. The roots of this 1981. Smithburg decided to acquire Snapple. The roots of this decision went back to Smithburg’s experience in the successful acquisition of Gatorade in 1983.

▪ At Gatorade, the management team stayed with the business after the deal. All but one of the top team at Snapple moved on, at Gatorade, operations were in good shape.

▪ Snapple relied on entrepreneurial distributors, while Gatorade used a warehouse system.

� Low Effort Syndrome

� Failing to Recognize the Importance of Balanced Selection

� Casual Benchmarking

� Other companies benchmarking to GE’s A, B, C system of evaluating employees

� Paradox of Strategy

� Self-Licensing � Once an individual discloses his potential conflicts or unveils a

hidden agenda, he is likely to push the envelope even further.

� The Millionth Monkey Effect

� Illusion of Precedential Value

� Collective Action ProblemsCollective Action Problems

� End-Game Effect

� Fallacy of Power

� The person on top wants it, so it must be good.

� Exposure Anxiety� The fear of being exposed as weak.

� Rational Ignorance

� Where we choose not to know something relevant to our interests.

� Perceptual Narrowing� Panic narrows one’s thoughts. It reduces awareness to the most � Panic narrows one’s thoughts. It reduces awareness to the most

essential facts, the most basic instincts. This means that when one is being chased by a fire, all he can think about is running from the fire.

� Probability Neglect� Overestimating the odds of the things we dread the most actually

occurring, and underestimating the odds of the things we dread less.

� Sunk Cost Effect

� The tendency for people to escalate commitment to a course of action in which they have made substantial prior investments of time, money, or other resources.

� Supercomputer innovator Seymour Cray annually built and burned a sailboat, a reminder to routinely abandon last year’s burned a sailboat, a reminder to routinely abandon last year’s model.

� The Fallacy of Positive Transparency

� Self-Negating Prophecies

� As soon as you figure out what your enemy is doing and move to stop him, he simply shifts to something else.

� Probabilistic Contamination

� Presupposition that statistics must be true

� Sample Sizes

� Initial Experiments are Not Representative

� Dramatic examples coupled to big numbers� Dramatic examples coupled to big numbers

� Experience vs. Exposure

� Pyschophysical Numbing

� Identifiable Victim Effect

� Prosecutor’s Fallacy

� Severity and Frequency

� In general, the worse things are, the less common they are.

� Look for dramatic examples coupled to big numbers.

� Blunders

Storytelling vs. Probability and the Conjunctive ErrorDetermining Value of Statistics

� Blunders� Numbers that seem surprisingly large – or surprisingly small.

� Conflating relative and absolute risk.▪ 25% (increase) risk of heart disease due to second hand smoke

▪ Population – incidence of heart disease among non-smokers – 4%

▪ Enhanced risk of heart disease among non-smokers due to second hand smoke –5% (4% + 25%*4%)

▪ Non-smokers do not have a 25% risk of contracting heart disease

� Numbers that seem hard to produce - how could anyone calculate that?

� Domain expansion

� Definitions grow broader, so as to encompass a wider range of phenomena

� Surveys sponsored by advocates

Storytelling vs. Probability and the Conjunctive ErrorDetermining Value of Statistics

� Surveys sponsored by advocates

� Survey results that aren’t accompanied by the text of the questions asked

� Wording of questions that seems to encourage particular responses

� Convenient (e.g. very short) time frames

� Whether sampling a different group would make a difference |

� Use of superlatives – e.g. highest, number one

Storytelling vs. Probability and the Conjunctive ErrorDetermining Value of Statistics

� Any time there is a wide variation in numbers-such as those for income or wealth-the median usually gives a more accurate “average” than the mean

� We can basically ignore stories that report relative risks elevated by less than 200%. If you read about A increasing the risk of B by, say, 37 – or any number less than 200 –percent, the relationship isn’t very interesting

� Flawed comparison

� Officials are fond of reminding the public that they face a greater risk from drowning in the bathtub, which kills 320 Americans per year, than from a new peril like mad cow disease, which has so far killed no one in the United States. The fact is, anyone over six years old

Storytelling vs. Probability and the Conjunctive ErrorDetermining Value of Statistics

no one in the United States. The fact is, anyone over six years old and under eighty years old―which is to say the vast majority of the U.S. population―faces little appreciable risk at all in the tub. For most of us, the apples of drowning and the oranges of mad cow don’t line up in any useful way.

� You stand a greater risk from dying while skydiving than you do from some pesticide. Well if you don’t skydive, your risk is zero. The choices have to come from the menu of things individuals really do every day.

� Benjamin Booksby is best described as a meek, unassertive person. He wears big glasses with thick lenses. He was bullied in school because he preferred reading in the library to playing sports. His favorite website is Amazon.com. He enjoys reading much more

Storytelling vs. Probability and the Conjunctive ErrorStorytelling vs. Probabilistic Confusion

website is Amazon.com. He enjoys reading much more than socializing.

� He’s either a salesman or a librarian.

� Which one do you think he is?

� Ratio of salesmen to male librarians – 100 to 1� Percentage of salesmen that match Benjamin’s

description – 10%� Percentage of librarians that match Benjamin’s

description – 90%

Storytelling vs. Probability and the Conjunctive ErrorStorytelling vs. Probabilistic Confusion

description – 90%� Number of men that meet description:

� Salesmen – 10 (100 x 10%)

� Librarians – 1 (1 x 90%)

� Conclusion – Benjamin is (more than) 10 times more likely to be a salesman than a librarian

� Prosecutor’s Fallacy

� O.J. Simpson Case

� Defense said “4 million women are battered annually by husbands and boyfriends in the US. A total of

Storytelling vs. Probability and the Conjunctive ErrorStorytelling vs. Probabilistic Confusion

by husbands and boyfriends in the US. A total of 1,432, or 1 in 2,500, were killed by their husbands or boyfriends.”

� The relevant number is not the probability that a man who batters his wife will go on to kill her (1 in 2,500) but rather the probability that a battered wife who was murdered was murdered by her abuser.

� For every 100 million miles that are driven in vehicles in the United States, there are 1.3 deaths.

� If you drive an average of 15.500 miles per year, as many Americans do, there is a roughly 1 in 100 chance you’ll die

Storytelling vs. Probability and the Conjunctive ErrorStorytelling vs. Probabilistic Confusion

Americans do, there is a roughly 1 in 100 chance you’ll die in a fatal car crash over a lifetime of 50 years of driving.

� To most people, the first statistic sounds a whole lot better than the second. Each trip taken is incredibly safe. On an average drive to work or the mall, you’d have 1 in 100 million chance of dying in a car crash. Over a lifetime of trips, however, it doesn’t sound as good: 1 in 100.

� Decision Making Team

� Better decisions will be made if there is an intact team

� Have insiders and outsiders

� Use balanced selection in temperament and personalities

� Some members should be charged with carrying out decision, other � Some members should be charged with carrying out decision, other should not be charged with carrying out decision

� Are influencers / advisors loyal to the decision maker?

� How closely is accountability tied to decision makers / advisors? Secrecy is a problem. No accountability.

� More foxes than hedgehogs▪ Hedgehogs aggressively extend the explanatory reach of that one big thing into

new domains.

▪ Hedgehog personalities were generally very eager, too eager, for closure. They stuck with one big idea precisely because they wanted to know it completely, to have the sensation of reaching a total and final understanding.

� Decision Making Team

� Some should have sunk costs, some should not

� Some should have been in industry over long periods of time and seen different stages in the cycles

� Some should have positive frames and some should have negative framesframes

� Techniques to Find Problems

� Anne Mulcahy – Xerox – direct contact with employees and customers – top 500 customers were assigned to one member each of the executive team – all Xerox executives were involved – CMO, CFO, HR, etc. CFO, HR, etc.

� Customer Officer of the Day Program – One of 20 very senior executives are in charge of customer service for the day – they must listen to the customer, resolve the problem and assume responsibility for resolving the underlying problem

� Techniques to Find Problems

� Helena Foulkes – SVP – Marketing, CVS – Customer Comment of the Day Program – someone selects one customer call and forwards the call to many senior executives; other senior executives have to handle these callshandle these calls

� David Tacelli – LTX – rotate people who assess customer satisfaction – account managers may become too complacent

� Be prepared to catch ideas on the fly

� Albert Einstein often cut himself shaving, because he became so excited with the ideas that came to him while shaving

� John Fabel, combined the structure of a suspension bridge with the components of a traditional backpack—and invented a new, easier-to-tote, and now popular pack called the Ecotrek.

� Georges de Mestral noticed how burrs stuck to his dog’s fur and, reasoning metaphorically, came up with the idea for Velcro.

� Adobe encourages small groups of engineers to develop ideas in a process run by the Corporate Development Group. The seed idea has to find sponsorship from a senior executive who helps clear away internal process constraints. In this way, Adobe can test cool ideas without overinvesting in them too early. without overinvesting in them too early.

� The discussions on the Google idea board exhibit “geek machismo”: employees vie for the honor of being the person who delivers the smartest electronic “zaps” that support, modify, or even kill an idea. If an idea gets enough support on the Web board, its originator wins a face-to-face meeting during “office hours” with Ms. Mayer.

� Brainstorming

� Write down as many different uses that you can think of for the following objects:

▪ a brick

▪ a blanket▪ a blanket

� This is an example of what’s called a “divergence test” (as opposed to a test like the Raven’s, which asks you to sort through a list of possibilities and converge on the right answer). It requires you to use your imagination and take your mind in as many different directions as possible. What the test giver is looking for are the number and the uniqueness of your responses..

� Brainstorming

� Go for Quantity. Good ideas emerge from lots of ideas. Set a numerical goal —say, a total of one hundred ideas.

� Encourage Wild Ideas. Extremism is a virtue. The right idea often flows from what initially seems outlandish.

� Be Visual. Pictures unlock creativity.

� Defer Judgment. There’s no such thing as a bad idea, so banish the naysayers. Think creatively first and critically later.

� Understand the resistance to ideas

� Assign idea and credit to a more powerful person

� Give competitor credit for your innovation� Give competitor credit for your innovation

▪ Say rival will implement the innovation and then gain a competitive advantage

� Make the idea have a benefit for powerful people at your firm

▪ Selling state assets in Russia

� Allow an outsider to break the news – don’t release ideas anonymously

TEAM Hitting Pitching Fielding

Boston Red Sox 1 4 2

Washington Nationals 2 1 4

Chicago Cubs 4 2 1

New York Mets 3 3 3

Scenario 1 Round 1 Washington (w) v. New York

Round 2 Chicago (w) v. Boston

Round 3 Washington (w) v. Chicago

Scenario 2 Round 1 Chicago (w) v. New York

Round 2 Boston (w) v. Washington

Round 3 Chicago (w) v. Boston

Scenario Round 1 New York v. Boston (w)

Round 2 Chicago v. Washington (w)

Round 3 Boston (w) v. Washington

� Must agree on what the target / goal is.

� Information Gathering:

� Problems with less than first hand information� Problems with less than first hand information

▪ Filtered

▪ Lack emotional content

▪ All senses are activated

▪ Time lag

� Have skip-level meetings a la Starbucks

▪ Make clear that the meeting is not about the middle manager

� Information Gathering:

� Must know how to interpret results from focus groups

▪ Was one person dominating the discussion

▪ People respond much better to what was familiar – TV shows▪ People respond much better to what was familiar – TV shows

▪ How effectively were results from feedback dials used – what did people dislike, where they so engaged that they forgot to turn up their dials?

▪ Is the (taste) test executed in the same way that people consume the product?

� Information Gathering

� Questions to ask

▪ What are the odds, if you were a betting man / woman

▪ Would you bet $1,000 of your own money

▪ What data would cause you to change your mind?

▪ “What has changed since the last time we looked at this issue?”

� Fundamental Paradox of Intelligence Gathering� Sometimes information gathered through environmental scanning

and analysis seems too sensitive to be shared broadly within an organization.

� Information Gathering

� Evaluating answers to questions▪ Answers that reflects wishful thinking – I hope so, I am encouraged

by signs that, promising developments include

▪ What relevant experience do you have to make such a recommendation?

▪ Misdirecting answers

▪ Dead experts (or experts that are unavailable)

▪ Equivocating

▪ There is an enormous problem with research that relies on recollection by the parties involved in a project, as so much management research does when it seeks out keys to subsequent success.

� Assessing information

� “Tell me what you know. Then tell me what you don’t know, and only then can you tell me what you think.” – Colin Powell

� List in three separate columns what is known, unclear and presumed

� When considering analogies, write down likenesses and differences; successes and failuressuccesses and failures

� When finalizing options, write a few sentences that explain why the option is best

▪ E.g. Selling generic products is the best method to enhance revenues because….

� The UK government requires planners to augment their estimates for budgets associated with large transport projects by a factor known as the “optimism bias uplift.”

� Anonymous surveys

� Group leader knows that such surveys can happen at any time, which tends to keep him honest, and, if he is overly optimistic, management will probably know.

� Rumor contests

� Research should be presented in prose not Powerpoint –assumptions fall apart – e.g. cross-selling - these documents should be read first – before the presentation –because the presenter might be naturally very persuasive

� After the Bay of Pigs fiasco – President Kennedy did not attend initial meetings where new issues were raised for the first time – there would be less true give and take with the President in the room.

� Dialectical Inquiry - Kennedy would also break his executive committee into two subgroups – each would work independently on a policy decision and reconvene for debate and cross-examination

� Must encourage everyone to speak about all issues – must not rely completely on experts.

� Must define the problem first – make a decision – and then implement the decision – be careful not to worry about implement the decision – be careful not to worry about consensus too early in the process

� “Multi-voting” techniques can be employed to winnow down the alternatives to the best few. In multi-voting, members of the group are given a limited number of votes to cast in favor of specific alternatives. They do not have to advocate for a single alternative at this point, but rather can support for a single alternative at this point, but rather can support their top few choices. The least supported alternatives can be eliminated, and debate can continue.

� Visualize solutions in multiple permutations

� Review past decisions by comparing decisions – less focus on situational elements, more focus on broad principles

� L’Oréal managers have the “right to make an error.” But if they make the same mistake twice, it suggests an inability to learn – and their career is at risk.

� It is common for managers to be required to bring the It is common for managers to be required to bring the acquisition proposal to the board on three occasions: to alert the board that managers are considering a target; to get the board’s approval to indicate a price range for the business; and to get approve the final terms.

� Do not average a third valuation analysts’ conclusions with the initial two, since averaging could provide undue influence to an outlier conclusion

� Better to average the third valuation analyst’s conclusion with that closest to his own. The first two valuation professionals should know that this will be done at the professionals should know that this will be done at the outset. No one desires to the be author of an outlier conclusion.

� Maybe best yet, have the third valuation analyst chose which of the initial two appraisals are most reasonable. The two valuation analysts would be inclined to reach similar conclusions. The initial valuation analysts would not want to have their assessments be unaccepted.

� How to Get Organizations to Share Information

� Intellipedia allows 37,000 officials at the CIA, FBI, NSA and 13 other intelligence agencies share information and even rate one another in accuracy in password protected wikis.

� Preoccupation with failure � Preoccupation with failure � Do not dismiss small deviations, each small mistake is viewed as

potentially becoming more serious, scenario plan for mistakes, failures

� Mountain climbers, aircraft carriers, Toyota wants managers to bring problems to management meetings

� Failures are viewed as a window on the vulnerability on the entire system, not localizing failures – there is no such thing as an isolated failure

� A strong dissent is extremely important.

� Forces people to think harder about the issues.

� Sometimes the other decision makers shift their opinions.

� A strong dissent makes the other person take account of the point.� A strong dissent makes the other person take account of the point.

� Dissents put arguments on the record, force others to respond to them, and provide a springboard for the creation of new laws.

� Even those on the side of the majority have to take into account the opinions in response to the points raised by the dissenters.

� Hitler – assassination attempts were not successful, however they caused Hitler to doubt his own generals and sabotage his own military campaigns

� Listen to Propaganda

� They know the truth

� They want to manage expectation of their constituents.

� The more accurate the weapons, the better intelligence you � The more accurate the weapons, the better intelligence you need ═► mail campaign – can reach specific people with certain (characteristics), need to find such people.

� Prepare mental imagery and simulation in order to assess a situation and conjure up possible alternatives

� When you warn management of a problem, that problem should be accompanied by a proposed solution

� By focusing first on reaching consensus on “the problem” and then on its root causes, this technique makes the need for action harder to dispute. Likewise, agreement on objective criteria for evaluating options makes it difficult for special-interest groups to argue for their own narrow special-interest groups to argue for their own narrow political agendas. By the end of such a process, people may be willing to accept outcomes they never would have accepted at the beginning.

� Don’t make a decision unless there is disagreement

� The Persians deliberated on decisions when they drunk and when they were sober

� Dissent forces the participants to expose their opinions to a wide range of counter arguments.

� Diverse and well-founded arguments can reframe a problem so that everyone sees it in a new way.

� A unique solution can emerge that no one had considered before.

� Get an understanding of issue history

� Reduces impact of advocacy and hidden agendas

� “Don’t ask what’s the problem?” rather say, “Tell me the story.” – Avram Goldberg, Stop and Shop

� Try to understand the political dynamics occurring your counterparty’s organization� Kennedy reading into the two cables sent by Khrushchev

� Make contingency plans if plan does not track to goals� Make contingency plans if plan does not track to goals

� In times when intense concentration is needed, embrace habits so that you do not have to divert your thinking –Poker players do this effectively

� State opinions in testable form so that you can continually monitor your forecasting performance

� Always weigh benefits against costs

� Imagine that your decisions may be spot-checked

� Write the problem down� Write the problem down

� Use radical metaphors – such as your business problem as a sports, military or family issue

� Utilize an “outside view”. That is, instead of working on the decision for yourself, imagine that you are a consultant with Top Global, hired to analyze the problem and make recommendations.

� Give yourself time to think about the problem

� Forcing numerical scrutiny slows down the irrational part of the brain

� One antidote to hindsight basis is to make notes of why you are making decisions as you make them

� People in good moods are significantly better at solving hard problems that require insight than people who are cranky and depressed.

� List alternatives can improve the reliability of reasoning

� Discuss probabilities of being right and wrong

� Change the scope of the problem� Change the scope of the problem

� Reframe the issue in terms of time (lots of time to find a solution vs. need to find a solution in the near term)

� Reframe the question

� Activate different parts of the brain

� Consider how someone else would have solved the problem

� Respect dreams because they present uncertainty

� Make a point of deferring your decision – until you have had time to consider it on more occasions, when you are experiencing different moods.

� The more original your idea is, the less good advice other people will be able to give you.

� Entertain and test multiple hypotheses

� Argue the other side

� Publish your views� Publish your views

� Do you have twenty years of experience or one year of experience repeated twenty times?

� Methods to combat the anchoring bias

� Be aware of the anchoring bias

� Provide a range first, not a single point value

� Work with multiple anchors

� Avoid only considering incremental scenarios� Avoid only considering incremental scenarios

� Remain open to new data

� Does research try to disprove or confirm a hypothesis?

� Testing Gut Checks� When you lack conclusive evidence, a good technique for making

a difficult decision is to flip a coin and then see if the result makes you wish it was best of three instead.

� An organization that eradicates emotion from every decision may ultimately pay an even stiffer price by eroding employee loyalty and public perception.

� When processing information, we are inherently prone � When processing information, we are inherently prone to give more weight to that which is more concrete and vivid at the expense of that which is more intangible and ambiguous.

� Target the most influential decision makers

� Usually those whose decisions impact the longest time horizon

� Many employees’ role is to provide input, not to veto recommendations. (They are still a part of the decision-making process.)

� Limit the number of people with veto power in the initial � Limit the number of people with veto power in the initial rounds

� When the short-run financial payoffs are slim or uncertain, it is particularly important to ask, Will we learn something, by taking this action, which will help us make better decisions in the future? Or conversely, Will we limit our future option by taking this action now? Considerations of the future provide an excellent tiebreaker.

� Strategic Learning and Teaching

� Consideration Index – When there is little emotional pain of losing, there is little learning. When there is a lot of emotional pain of losing (losing a big account to a competitor), there is a lot of reflection and learning.learning.

� Change Index - The attraction of past strategies is the manager’s perception of how rapidly the environment is changing. Rapid industry change makes it hard to learn what worked. Industry stability makes it easier to determine what works.

� Commitment Index – Addressed how quickly managers should embrace a strategy. If a strategy delivers consistent payoffs and the industry is stable, continue with the same strategy.

� Be Aware of Satisficing - We don’t get to deeper thinking until we run out of filling-in actions.

� A new chief executive, one of the youngest in his nation’s history, is being sworn into office on a bleak, cold, cloudy day in January. is being sworn into office on a bleak, cold, cloudy day in January. The new chief executive was raised as a Catholic. He rose to his new position in part because of his vibrant charisma. He is revered by the people and will play a crucial role in a military crisis that will face his nation. His name will become legendary.

� Spinoza’s idea was that “all information is initially accepted during comprehension and false information unaccepted only later.”

� Take more time when making the most important decisions

� Tell yourself to be rational in your decision making

� If the same coalitions keep forming, people may be breaking the no carryover rule

� One antidote to hindsight basis is to make notes of why you are making decisions as you make them

� Study art – as an observational tool – NYPD and medical students

� In developing measures, it is usually wasteful to develop detailed information beyond what is necessary to make correct decisions. Such attempts can create a false sense of confidence.

� Before doing marginal analysis we must optimize the current state.

� For example, when considering an expansion, it is wrong to conclude that because we already have excess people we don’t need to include the expense of adding any. The economics should be done with the excess people removed from the base case and added to the extent required in the expansion case.

� Best practices must be sought wherever they are, both inside and outside the company and industry.

� When Southwest Airlines sought ways to decrease the time it took to refuel, disembark and board passengers, and unload took to refuel, disembark and board passengers, and unload baggage, it studied NASCAR pit crews and drivers. Today, other airlines benchmark themselves against Southwest.

� Only demonstrated success in decision-making reveals an individual’s decision-making ability, and then, only for that type of decision.

� No mitigated speech

� Use different tools when making decisions – pens, computers, drawing

� Put a process in place for reviewing past decisions

� Track and calibrate your decisions� Track and calibrate your decisions

� Why are weather forecasters so well calibrated when the rest of us aren’t? The answer involves one of the best cures for overconfidence: quick, corrective feedback.

� Berkshire’s them, allowing them to learn from their mistakes.

� Prod others with multiple reminders about avoiding risk, not one big lecture

� Kleiner Perkins – Each partner evaluates a different aspect of the company seeking funding. All partners must agree that the company warrants an investment.

� It’s been shown that incentives can actually inhibit � It’s been shown that incentives can actually inhibit decision making. One way this happens is that people become self conscious about an activity that should be automatic.

� eBay CEO Meg Whitman attributes much of eBay’s success to the fact that management spends less time on strategic analysis and more time trying and tweaking things that seem like they might work. As she said in March 2005, “This is a completely new business, so March 2005, “This is a completely new business, so there’s only so much analysis you can do.”

� Avoid pocket vetoes

� Get a commitment in public to ensure this doesn’t happen

� Be able to explain your decision – you will increase respect for it – especially important if decision was made respect for it – especially important if decision was made from the gut

� Guard against the Priority Zero Rule� The very act of creating lists of priorities keeps them from being

accomplished. After the lists are drawn, people tend to effectively dedicate themselves to one task (often the one they suggested –and why not, it’s on the priority list!), others to different ones. Everyone will feel good, working away on priority issues, but none will get done.

� Inspire colleagues to feel accountable for the entire effort by making them responsible for something nobody else is doing. Then add some specific deadlines for their parts of the project. When competing priorities intrude, your colleagues will be much more likely to keep your colleagues will be much more likely to keep working on your idea than on projects that have no deadlines and where their contributions – or lack thereof – will go unnoticed. (Similar to assigning various people to bring things to a party.)

� Remove people from power who could block decision

� Jack Welch at GE when he chose a successor

� Paul Allaire at Xerox, chose a successor, he remained chairman, � Paul Allaire at Xerox, chose a successor, he remained chairman, other contenders for CEO joined the board as vice-chairmen

� Objective shouldn’t be consensus, which often becomes an obstacle to action, but buy in.

� Be Resolute Once a Decision is Made

� Those with the permanent colostomies were happier than those who could ultimately reverse them, “hope impedes adaptation.”

� Upon being stuck with a decision, we suddenly feel it’s not so bad. Voters, for instance, have been shown to recognize the strengths of a candidate they opposed―once that candidate is elected. And high school students become acutely aware of a college’s weaknesses―upon learning that it has rejected them. College students, likewise, come to appreciate how biased standardized tests are―after failing one.

� Despite the tremendous accuracy that predictive markets are capable of delivering, there are many concerns associated with predictive markets. These concerns include:

� Lawyers have many concerns about establishing predictive markets. For instance, they want to ensure that such activity does markets. For instance, they want to ensure that such activity does not become gambling. Also, publicly-traded companies must ensure that participation in predictive markets does not run afoul of insider trading regulations.

� Participants in predictive markets could game the markets by low-balling estimates. For instance, betting that products will be shipped later would allow the team members to slack off and still meet the collective predictions.

� Middle managers are often resistant to predictive markets because they believe such markets undermine their authority. Forecasters are also resistant to such markets for fear of being displaced.

� Sometimes there are questions that are better left unanswered. Also, getting a prediction means publicizing a prediction which is Also, getting a prediction means publicizing a prediction which is not always wise.

� If and when such concerns are overcome, there are many challenges of establishing predictive markets such as:

� Participation in such predictions must be fair and non-� Participation in such predictions must be fair and non-discriminatory.

� Terms about what is predicted must be tightly defined.

� Awards must be promoted, paid for and distributed, all of which add to the expense and work commitments of running such markets.

� The markets must be liquid and it is hard to motivate (especially busy) people to participate in such markets.

� Conditions for wise crowds:

� Diversity of opinion, each person should have some private information

� Independence – each person’s ideas are not mirroring the ideas of others

� Decentralization – people can specialize and draw on local � Decentralization – people can specialize and draw on local knowledge

� Aggregation – a mechanism exists for turning private judgments into a collective decision

� Anonymity and incentives – encourage honest, unbiased information

� The averaging of multiple opinions – produces smooth, accurate signals

� Feedback – enables participants to evaluate past performance and learn how to weigh information and produce better results

� What is it?

� A disinterested / objective party tries to detect weaknesses in a strategic plan.

� Occurs after a strategic plan has been developed. No gotcha gambits during planning.gotcha gambits during planning.

� Why is a Devil’s Advocate Program necessary?

� Every decision maker makes mistakes in the way they make decisions.

� Benefits of Devil’s Advocate Program

� Costly mistakes will be avoided

� More ideas / solutions can be explored� More ideas / solutions can be explored

� The review process itself causes planners to be more prudent

� Better decision making processes will be put in place

� Those charged with execution will resent not having such a program

� Concerns with Devil’s Advocate Programs

� May not be sufficient time

� Costly� Costly

� Not popular

� Be careful that Devil’s Advocate is not being overly critical, not unnecessarily dampening enthusiasm

� Who should not be a Devil’s Advocate

� Friends due to schadenfreude issue

� Anyone involved in developing the strategic plan� Anyone involved in developing the strategic plan

� Anyone who could be impacted the acceptance or rejection of the strategic plan

� People with deep subject matter expertise

� People that are overly empathetic

� Employees who may suffer career or political consequences

� When the officer playing the red team (American forces) chose tactics that exposed weaknesses in the battle plan, the umpire, Admiral Yamamoto’s chief of staff, ruled against them.

� Who could be a Devil’s Advocate:

� A semi-retired partner – knowledgeable about the business but politically disinterested

� An outsider� An outsider

� Fundamental Attribution Error� When making judgments, we tend to over-attribute personal

factors and under-attribute situational forces. People default to the individual as cause, instead of the situation as cause.

▪ Priests final right of passage

▪ Salesforce

� Boomerang Effect � If you want to nudge people into socially desirable behavior, do

not let them know that their current actions are better than the social norm

▪ Electricity consumption research

� Trial Balloons � Be careful about seeking advice from someone you intend to do

business with once you implement your idea. No matter how close you think you are to your business associates, approaching them with a tentative business idea will shake their confidence in you and may cost you their existing business in addition to their you and may cost you their existing business in addition to their future business.

� Experiments� Experiments should be designed to yield usable results. They

should test the feasibility of an idea on a representative sample.

� Collaborative filtering – e.g. Netflix – you use the judgments of other people who share your tastes to filter through books or movies available

Name Tenure(Yrs.)

Job Skill Age Family Situation Comp.$

Adam 10 Average 37 Single 60K

John 7 Average 38 Sole supporter of wife, 2 kids 52K

You must terminate two employees? Who do you terminate?

John 7 Average 38 Sole supporter of wife, 2 kids 52K

Mary 8 Poor 43 Single mother, 3 kids 49K

Bob 2 Excellent 28 Single 55K

Jane 9 Good 37 Married, husband works, 0 kids 57K

Frank 3 Excellent 38 Married, wife works, 3 kids 41K

Susan 6 Average 29 Sole supporter of husband, 1 kid 52K

Timothy 3 Excellent 42 Divorced, supports 2 kids 55K

Peter 2 Good 55 Married with 2 grown kids 38K

Nancy 1 Average 44 Married, no kids 37K

� Your company is beginning to sell goods in a foreign market, and you are faced with the problem of choosing a distributor. The first choice is a long-term contract with a firm with whom you have done business in the past, and whose distribution system reaches 50 percent of all and whose distribution system reaches 50 percent of all potential customers. At the last moment, however, a colleague suggests that you consider signing a one-year contract with another distributor. Although a year ago their coverage reached only 25 percent of customers, they claim they invested heavily in distribution resources and now expect to be able to reach 75 percent of customers.

� A man buys a $78 necklace at a jewelry store, and he gives the jeweler a check for $100. because the jeweler does not have the $22 change on hand, she goes to another merchant next door. There she exchanges the man’s check for $100 in cash. She returns to her store man’s check for $100 in cash. She returns to her store and gives the man the necklace and the change.

� Later the check is returned by the bank due to insufficient funds in the buyer’s account, and the jeweler must then give the other merchant $100. The jeweler originally paid $39 for the necklace.

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