Bad Decisions and Bad Strategies1—Why do owners/senior
managers make bad decisions and select bad strategies?
In this months article we will examine four reasons why this
happens, and next month we will look at five more reasons.
Underestimating Uncertainty
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
consider the real uncertainties of the future and future conditions.
There is a tendency to project the past onto the future.
Seldom does the future turn out to look anything like the past.
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, just a
reliance on wishful thinking. Although hunches and gut instinct
are part of many decision making processes, it would be wise
not to bet the future of the company on a hunch.
Overreliance on Selected Information
Anecdotal evidence, especially if it’s from a superior or an
“expert,” elaborate stories or newly developed information are
given much more credibility even if more routine information
or generally known data, although less spectacular, are more reliable
and relevant to current circumstances. As with urban legends,
the more often the anecdote is repeated, especially by a
superior or “expert,” the more credible and “reliable” it becomes.
Remember, wishing does not make it so. Remember, too, that
it is rare for an outsider to know more about your company and
industry than you do. Take their input, advice and opinions,
but be cautious about accepting it as gospel.
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. What is interesting
is that this happens even when participants see the setpoint
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 reaches of both ends of the possibilities. This does not mean
that the answer or solution will be found at the mid-point. That
approach must be avoided. Just as we said last month, the “bestmost
likely-worst case” scenario is to be avoided.
About the Author
L. Douglas Mault is president of the Executive Advisory Institute,
Yakima, Wash.
1 Adapted from E. Olmsted, HBSP, 9-391-172 (1991).
2 A. Tversky & D. Kahneman, “Judgment Under Uncertainty: Heuristics
and Biases” Science, vol. 185 (1974).
