inSTRATEGIA helps companies to identify cognitive biases when making strategic decisions and implement de-biasing techniques. By Christelle Espinasse

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Improving the quality of decision-making
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This presentation is made by INSTRATEBIN, a division of P&C Ventures Limited (‘P&C’). It is partially based on
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2007 - From the largest take-over in the
history of the financial industry…
US$99bn
US$34bn
… to the largest loss in British corporate history as
the acquisition is written-down in 2008.

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‘Underlying deficiencies in RBS’ management capabilities and style,
governance and culture made it prone to make poor decisions based on
flawed analysis and judgement’.
UK FSA review of RBS’ ill-fated acquisition of ABN Amro
Source: House of Commons Treasury Committee

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Endowment effect
Status quo
Risk aversion
Anchoring
Sunk cost effect
Regret aversion
Mental accounting
Loss aversion
Cognitive biases create deviations from rational decisions
Illusion of superiority
Excessive optimism
Illusion of control
Illusion of understanding
Overconfidence
Delusion of absolute performance
Tunnel vision
Confirming with group
Herding instinct
Illusion of skills
Confirmation bias
Halo effect
Consistency bias
Inappropriate extrapolation
Power of story telling
Framing effect
Illusion of validity
Vividness
Representativeness
Emotional tagging Sunflower management
Saliency
Presumed association
Base rate
Champion bias
Availability
Group thinkingFalse consensus
Inappropriate attachmentsMisaligned individual interests
Commitment
Planning fallacy
Presumed association
Rationalisation
Embracing certainty
Management by example
Self deception
Conformity

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Cognitive biases in action at RBS
The deal
§ A CEO who had made his reputation on the back of RBS’ successful take-
over of Natwest in 2000 and who was under pressure to improve returns.
§ An Investment Banking (IB) CEO who, like his competitors, wanted to be part
of an era of rapid growth and global domination and build its IB business,
lured by the success of Goldman Sachs.
§ Chairman of the Board, Board members and senior bankers offering no
countervailing voices to the domineering CEO despite their concerns about
the deal and the ability of the IB’s management team to integrate the
business.
§ Blasé attitude of senior RBS managers to the complexity of integrating a
bank like ABN ‘it normally takes 30 days, but because this is a more complex
deal we will give ourselves 45 days’.
The players
§ The original crux of the strategic rationale had been ABN Amro’s US retail
operations. As this was sold before RBS could act, the Chairman of RBS
global banking and markets presented a new set of projections arguing a
hostile bid (against the bid of a competitor) could be justified purely on the
basis of ABN’s investment banking operations – ‘you guys have convinced
me this is a potentially transformational acquisition for us. And that’s why I
have bid for it.’ RBS CEO
§ None of the concerns voiced by external advisors, investors, analysts and
ABN’s own staff council about liquidity risks, as well as issues around sales of
bonds and derivatives exposure were heard. FT July 2007 – ‘It seems
extraordinary that Barclays and RBS are so desperate to buy this second-
division bank at such a massive premium. The offers look wildly expensive
and will need renegotiation otherwise they both face collapse’
§ Two months before the acquisition, RBS executives were unable to provide
robust answers to basic questions about what the integration would entail
and how they would develop the businesses.
Illusion of superiority
Excessive optimism
Illusion of control
Illusion of understanding
Overconfidence
Tunnel vision
Confirming with group
Herding instinct
Confirmation bias
Halo effect
Consistency bias
Inappropriate extrapolation
Power of story telling
Framing effect
Illusion of validity
Vividness
Sunflower management
Champion bias Group thinking
False consensus
Inappropriate attachments
Misaligned individual interests
Commitment
Presumed association
Rationalisation
Embracing certainty
Management by example
Self deception
Source: Daily Telegraph

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72%
80%
of decision-makers
make their choices
without careful
weighting
Source: McKinsey
of executives assess
the quality of their
strategic decisions as
generally poor

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Data gathering
Analysis
Insights /
Judgements
Decision
Not every organisation has the benefit of an analytical and facts based investigation
from the UK FSA to review what went wrong with their strategic decisions.
A disciplined and consistent process is critical to catch the cognitive biases
before they hijack decision-making.

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We work with our clients to help them implement
de-biasing practices which aim to…
strategic decisions made by the
the most importantCognitive biases affect
smartest managers in the best companies.
... purposefully apply rational thought to detect poor
judgement and improve decision-making.

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