What is Behavioural Strategy, and How can Businesses Mitigate Cognitive Bias in Their Decision-Making Processes?

Take a look at how businesses use behavioral strategy to mitigate the effects of cognitive bias on their organization.

The birth of behavioral strategy

In a 2010 McKinsey Quarterly article, Dan Lovallo and Olivier Sibony used the term **‘behavioral strategy,’** referring to the intersection of corporate decision-making and behavioral economics. In a survey of over 1000 business executives, McKinsey found that the majority were satisfied with their organization’s strategic decisions only half the time. Even in the best companies, large projects rarely go to plan; they exceed their allotted budget and initial timelines; revenue forecasts prove overly optimistic.

Better strategic decision-making requires two components – an accurate estimation of the organization’s implementation and execution capabilities, and a realistic expectation of competitors’ reactions to planned changes. Both require judgment calls, which means they are susceptible to overoptimism and overconfidence as well as loss aversion.

Lovallo and Sibony draw on these observations to suggest that behavioral strategy is key for companies to make better strategic decisions. Instead of addressing bias individually, encourage debiasing through process and culture. Instead of relying on employees’ individual efforts, focus on tools and processes. At the end of the day, good process will weed out poor analysis.

The power of daily decisions

Debiasing practices should not be limited to key management decisions. Instead, they should be embedded into even seemingly mundane daily activities performed throughout all levels of the organization. After all, when a chief executive gives the final stamp of approval on a proposed project, their judgment is based on information gathered and presented by their team. They have to rely on the comprehensiveness, reliability, and accuracy of the information before them. But what makes it into the proposal is driven by small everyday decisions.

Some decisions within the organization may not make it to management level but still impact a company’s overall direction. Functional, routinary activities can compound on one another and effectively shift a company’s course without undergoing any formal process. In this regard, a culture that embraces debiasing practices at all levels – encouraging healthy discussion and dissenting opinions, using red teams, and celebrating diversity of background, skill, and personality – can help a company maintain its course without the distraction of noise.

A decision checklist

In the article Before You Make That Big Decision…, Kahneman, Lovallo, and Sibony propose a checklist of 12 questions that decision-makers should answer to check for the undue influence of bias on projects presented before them.

The first part of the checklist requires the decision-maker to check for any red flags to do with the recommending group. Do they have any vested interest in the proposal, like reputation or career advancement? Have they become so attached to their idea to the point of losing objectivity? How about the group dynamics? Groupthink is particularly problematic, as it prevents members from voicing out dissenting views and exploring alternative paths.

The decision-maker needs to answer these questions without asking them directly of the recommending team. If they must consult with others within the organization, they must do so discreetly. And if a dissenting member in the group has relevant inputs, the decision-maker should have a separate discussion with them.

A decision checklist, continued

The majority of the decision checklist focuses on the process that the team undertook to craft their proposal. The decision-maker will want to follow the team’s line of thinking from start to finish. In doing so, they can check for gaps in logic or for instances where bias might have influenced the team.

A few key questions form this part of the assessment. What assumptions did the team make in creating the proposal? What information was used – or overlooked? How thoroughly did the team assess other options? Does this proposal draw inspiration from other projects? How comparable are they? When referring to successful projects, we might assume that, by virtue of similarity, our proposal should likewise succeed. In our optimism, we may fail to see where key variables differ. Conversely, examining similar projects that failed can prove valuable in uncovering risks previously unforeseen. Ultimately, the decision-maker should ensure that the team is recommending this particular project because it is a solid plan, independent of extraneous details.

A decision checklist, final steps

The final part of Kahneman, Lovallo, and Sibony’s decision checklist involves evaluating the quality of the proposal. Many business projects fail because of overconfidence. Managers draw up unrealistic timelines and make overoptimistic forecasts, or they fail to consider how competitors might respond to their plans. They might overestimate the firm’s capabilities, or rely on a star employee who may not stay long enough to see the project through. In crafting proposals, it’s important that the team has examined the worst-case scenario so that contingencies and risk mitigation strategies are put in place.

Conversely, a company culture that is allergic to risk might have managers forgoing viable alternatives due to fear of failure. To this end, it is important that key members are aware of the company’s current risk appetite.

Decision-makers are reminded to avoid showing partiality to any one option while the proposal is being drawn up. Doing so risks undue influence on the recommending team, potentially swaying their recommendation toward the decision-maker’s implied preference.

Gary Klein’s premortem

Gary Klein introduced **‘premortem planning’** in 2007. Since then, its ease of use has endeared itself to business executives and behavioral scientists. The premortem starts with the idea that pessimism is taboo in project planning. We do not voice concerns when everyone else seems on board with an idea. The internalized notion of being a team player prevents us from examining the potential pitfalls of a plan.

In premortem planning, individuals are asked to imagine that the project has moved forward. Unfortunately, it was a fiasco. With this in mind, team members list down all possible ways the project could have gone wrong. This practice shifts individuals’ mindsets. Whereas they would have initially felt uneasy entertaining the idea of failure, the exercise removes the burden of going against the grain. Failure has become a given, and the task is now to come up with all the possible threats lying in wait. The veil of confidence and optimism in the project is removed, allowing for a clear view of blind spots previously undetected.

Pinpointing crucial decisions

Not all decisions require stringent process reviews and checklists. Applying equal rigor across all decisions is costly and time-consuming; therefore, organizations must identify which choices are worth time and effort and which ones are more likely to be impacted by bias. These are the decision processes that warrant redesign. Sibony, Lovallo, and Powell identify three high-stake strategic decisions with high susceptibility to bias.

Investment decisions are prone to excessive risk-taking for high-stakes projects and too little for minor decisions. To address this, the company needs to set its general risk appetite. Risk levels should then be assigned for different investment sizes.

Second, resource distribution suffers from inertia and status quo bias. Budgets are often set in proportion to previous years’ allocations regardless of changing contexts. But a business unit entering a high-growth phase requires extra funds to effectively capitalize on opportunities. Conversely, units in declining markets can make do with smaller budgets.

Lastly, where innovation is required, teams may be hampered by myopic lenses. Organizations must widen their angle of vision to approach opportunities with agility and innovation.

Takeaways from behavioral strategy

Key to Lovallo and Sibony’s ideas on behavioral strategy is making sure that organizations design their decision-making processes with intent, in line with the company’s overall strategy. To this end, businesses can standardize decision-making processes and set clear evaluation criteria for key decisions. Where complex planning is involved, a red team can prove valuable – an independent group that assesses and critiques plans without prior attachments or biases. Fleshing out key analyses in the presence of neutral third parties helps to identify any gaps in logic. Additionally, scenario planning can unveil eventualities previously unforeseen.

In terms of organizational culture, companies will want to nurture an environment that encourages debate – by depersonalizing discussions and cultivating a climate of trust. In this vein, leaders at the top will set the tone for the rest of the workforce.

It is worth remembering that, besides cognitive biases, conscious biases also often impact organizations. Office politics can drive group dynamics and can influence decision-making. These, too, need to be addressed and will require their own toolkit.

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