Page 84 - Harvard Business Review (November-December, 2017)
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for both groups. Because a competitor had beaten the 1958 Buick from Coleman, Texas, to Abilene. They
company to the market with a superior product, the had all tacitly agreed to the trip, but as it turned
new product was almost bound to fail. The only differ- out, none of them had wanted to take it.
ence between the two situations was the timing of the • Personal identification. Research in both psy-
question: before commitment to the project versus chology and sociology suggests that people’s
when it was nearing completion. identities and social status are tied to their com-
What exactly is going on? Research has identified mitments. Thus withdrawing from a commitment
a number of mutually reinforcing biases that collec- may result in a perceived loss of status or a threat
tively explain why people’s judgment may be swayed to one’s identity. At the same time, no executive
by a prior commitment to a course of action. The six likes to admit that a decision was wrong, because
most important are: the ability to make smart decisions is part of what
• The sunk cost fallacy. This bias is well known in defines a good executive.
management literature. When making investment In combination, these biases lead a company’s
decisions, people often factor in costs they have decision makers to ignore signals that their strategy
already incurred. If they abandon a project, those is no longer working. It is what Karl Weick, of the
costs won’t be recovered. Their hope is that if the University of Michigan, calls consensual neglect: the
project continues, the costs can be recouped, vin- tendency of organizational decision makers to tacitly
dicating earlier decisions to invest. But a rational ignore events that undermine their current strategy
decision maker will look only at future costs, not and double down on the initial decision in order to
at past ones. justify their prior actions.
• Loss aversion. This bias, too, is well established. If Powerful as these biases are, the research also
withdrawing from a course of action implies certain shows that it is possible to counteract them by apply-
and immediate losses, decision makers often prefer ing certain processes and practices in decision mak-
to allocate more resources to continue with it—de- ing. In the remainder of this article we’ll describe the
spite low expected returns—if they see any chance six of them that have proved most effective in a busi-
of turning the situation around. ness context. A company that applies all six practices
• The illusion of control. This bias clearly rein- will significantly reduce its likelihood of falling into
forces the previous two: People habitually over- the escalation trap.
estimate their ability to control the future. In one
experiment two groups of participants bought
lottery tickets for $1. One group was assigned ran- 01 SET DECISION RULES
dom lottery numbers and asked at what price they One way to stimulate more-objective decision making
would be prepared to sell their tickets. The average is to agree to decision rules in advance. Intel, for ex-
answer was $1.96. The second group, whose mem- ample, when it was still focused on producing DRAM
bers were allowed to pick their numbers, wanted memory chips rather than microprocessors, made a
at least $8.67. Prior success—as in HMV’s case— rule that production capacity would be allocated to
tends to amplify the illusion; people are quick to products according to several criteria, particularly
take credit for the outcomes of decisions and also margin per wafer. This objective formula was de-
confuse having correctly predicted the future with signed when no concrete decisions were yet at stake.
having made it happen. Some time later, when production capacity had to
• Preference for completion. A wealth of psy- be allocated between the new technology of micro-
chological experimentation suggests that people processors and the old one of DRAMs (to which sev-
have an inherent bias toward completing tasks— eral top managers at the time were still firmly commit-
whether that means finishing a plate of food or ted), managers helped sway the company toward the
seeing a project through. new technology by pointing to the objective formula,
• Pluralistic ignorance. Dissenters often believe which favored microprocessors.
that they alone have reservations about a course When hard figures aren’t available and judgment
of action; as a consequence, they remain silent. must be applied, non-numerical rules can serve. A
Others, meanwhile, interpret their silence as large television production group, for example, which
agreement. In extreme cases this can result in ev- owns companies across the globe, created a decision
eryone’s agreeing to a decision that no one believes rule to guide investments in new series, which were
in. Jerry Harvey, of George Washington University, always proposed by local companies rather than de-
called this the Abilene paradox. He described a trip veloped centrally. After a series had been prototyped,
that he and his wife and parents made one 104° it would be shown to the other production companies.
July afternoon in his parents’ unairconditioned If some of them signed up to license it for their home
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