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1 instrategia.com
Improving the quality of decision-making
instrategia.com
2 instrategia.com
This presentation is made by INSTRATEBIN, a division of P&C Ventures Limited (‘P&C’). It is partially ba...
3 instrategia.com
2007 - From the largest take-over in the
history of the financial industry…
US$99bn
US$34bn
… to the lar...
4 instrategia.com
‘Underlying deficiencies in RBS’ management capabilities and style,
governance and culture made it prone...
5 instrategia.com
Endowment effect
Status quo
Risk aversion
Anchoring
Sunk cost effect
Regret aversion
Mental accounting
L...
6 instrategia.com
Cognitive biases in action at RBS
The deal
§  A CEO who had made his reputation on the back of RBS’ suc...
7 instrategia.com
72%	
   80%	
  
of decision-makers
make their choices
without careful
weighting
Source: McKinsey
of exec...
8 instrategia.com
Data gathering
Analysis
Insights /
Judgements
Decision
Not every organisation has the benefit of an anal...
9 instrategia.com
We work with our clients to help them implement
de-biasing practices which aim to…
strategic decisions m...
10 instrategia.com
10/F Central Building
1-3 Pedder Street
Central, Hong Kong
Tel: +852 3478 7315
Website: www.instrategia...
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Helping companies improve the quality of decision making

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

By Christelle Espinasse

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Helping companies improve the quality of decision making

  1. 1. 1 instrategia.com Improving the quality of decision-making instrategia.com
  2. 2. 2 instrategia.com This presentation is made by INSTRATEBIN, a division of P&C Ventures Limited (‘P&C’). It is partially based on information obtained from market sources. No representation is made by P&C as to the accuracy of such information. This presentation does not in any way whatsoever include advisory, corporate finance, actuarial, legal, property valuation, taxation, accounting, regulatory financial or other advice of any kind in any jurisdiction and no responsibility or liability, with respect to any action, omission, recommendation or comment made by P&C in relation to any matter or anything contained herein will be accepted. Readers shall be responsible for obtaining all such advice as they think appropriate on such matters and will be responsible for making their own investigations and appraisals in this respect. No action, omission, recommendation or comment made by P&C in relation to this presentation shall constitute, or be deemed to constitute, a representation, warranty or undertaking by P&C. This presentation has not been reviewed by appropriate or relevant legal counsel and P&C reserves the right without assuming the obligation to seek such legal opinions as may be required to ensure that the views set out by P&C fully comply with all legal and regulatory requirements. COPYRIGHT P&C VENTURES LIMITED – NO REPRODUCTION ALLOWED WHATSOEVER
  3. 3. 3 instrategia.com 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.
  4. 4. 4 instrategia.com ‘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
  5. 5. 5 instrategia.com 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
  6. 6. 6 instrategia.com 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
  7. 7. 7 instrategia.com 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
  8. 8. 8 instrategia.com 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.
  9. 9. 9 instrategia.com 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.
  10. 10. 10 instrategia.com 10/F Central Building 1-3 Pedder Street Central, Hong Kong Tel: +852 3478 7315 Website: www.instrategia.com

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