Bad Decisions and Bad Strategies

L. Douglas Mault

November 2007

Why do owners/senior managers make bad decisions and select bad strategies. Here are nine reasons uncovered by behavioral decision analysts.

Number One: Underestimating Uncertainty
As you may recall, over the prior three months we talked about dealing with uncertainty. Well, the reality is that people routinely underestimate the amount of uncertainty in facts, figures and future outcomes.2 This propensity is often seen in strategic and tactical planning exercises. People place unwarranted faith in their or their teammates’ estimates of current average industry profitability, potential competitive reactions or the results of possible courses of action. They fail to con-sider the real uncertainties of the future and future conditions.

Number Two: Winning and Losing Streaks
Statisticians and probability theorists know there is no scientific evidence of winning and losing streaks. People often bet their company’s future on the premise, however illogical, that "we’re on a roll” or "our bad luck is going to change soon.” There is clearly no understanding of probability theories and a reliance on wishful thinking. Deal with facts, not desires.

Number Three: Over-reliance on Selected Information
Anecdotal evidence, especially if it’s from a superior, an elaborate story from an "expert” and newly developed informa-tion are given much more credibility over more routine information or generally known data. Although the latter may be less spectacular, they are more likely to be more reliable and relevant to current circumstances.

Number Four: Starting from a Set-point
Research shows that if a result, a target or a finite point is offered as a possibility early in the planning/analysis phase, the final answer is often perilously close to the set-point. This happens even when participants see the set-point selected by random drawing or even with a roulette wheel. There is much to be said for starting with two set-points at the far extremes of both ends of the possibilities.

Number Five: Baby Step
People tend to resolve problems or seize opportunities by taking baby steps. In other words, they think in small increments, in modifying past behaviors or minor variations of past practices rather than in the bold steps that must be taken to bring about substantive fundamental changes.

Number Six: Looking for the Good News People look for the good news that supports their chosen perspective and action plans. They fail to, or choose not to, look for the bad news, such as information and data that point out the flaws in their plans and programs.

Number Seven: Words Mean Something
Prospect theory3 shows that people make different decisions on whether the words used to describe the situation, espe-cially in terms of profits or losses, are positive or negative. People tend to take more risks when the potential for gain is great and/or for loss is small; they tend to take much less risk when the potential for gain is small and/or for loss is great. Therefore it is important to pick words carefully and to tend to neutrality in language.

Number Eight: Poor Metaphors/Analogies
"We want to be the Microsoft of the construction industry” or "We want to be the GE of the construction products indus-try.” English professors have a saying that all analogies limp; in other words, they are not particularly useful. This is even more true when the metaphor or analogy is not apt, or worse, misdirecting. If your company cannot mirror Microsoft’s or GE’s approach to the market, using them as models in not only inappropriate but can be disruptive of, and possibly de-structive of, critical thought processes.

Number Nine: Good Money after Bad
Research done by the Academy of Management shows that managers tend to invest even more if the plan or project is going downhill.4 This is often the case in spite of new information or because they fear the loss of station, money or repu-tation if they fail; or they fear being seen as quitters.

About the Author

L. Douglas Mault is president of the Executive Advisory Institute, Portland, Ore.