Cognitive biases and leadership decision making


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Humans make predictable mistakes in thinking - when business leaders do it, it costs lives and livelihoods. Understanding the neuroscience and behavioral economic foundations of thinking errors means business leaders can self-correct - and avoid costly mistakes. This presentation adapted from an upcoming book called The Science of Organizational Change.

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  • MLK 3939 books in OT4187 miles2160 miles moon
  • Cognitive biases and leadership decision making

    1. 1. Biases in the Boardroom Institute for Enterprise Ethics – Jan 2014 Paul Gibbons
    2. 2. Current Projects • From The Science of Organizational Change due out end 2014 – Neuroscience, probability, behavioral economics, systems theory “Can’t run 21st Century organizations with 20th Century understandings of human behavior” (PG) • The “Reboot” series – Reboot Your Life (goal setting, personal mission and vision, productivity) – Reboot Your Team – Reboot Your Leadership – Reboot Your Project • Balanced with teaching, consulting, non-executive directorships
    3. 3. Five topics for today 1. Introduction to Biases 2. Sunk costs, optimism biases and the planning fallacy 3. Tentative Solutions
    4. 4. Part I Intro
    5. 5. For fun… How many animals did Moses take onto the Ark?
    6. 6. 2nd grade math problem Consider this sequence… 2, 4, 6, 8… Your task is to deduce the sequence rule… you can give me a number and I will tell you whether it is in the sequence…
    7. 7. The world of biases • Past – Ostrich Effect – Sunk-cost bias • Present – – – – – Narrow framing Fixing symptoms The ‘specialist’ trap The ‘road-more-travelled’ trap The ‘herd’ trap • Future – Overconfidence – Fat-tail error – The planning fallacy Wikipedia lists 128! - Availability - Confirmation - Halo effect - Anchoring effect
    8. 8. Our questions for Part I • What biases have you seen in your experience? – Not just errors, but systematic mistakes made? • What were the financial and other costs? • What, in hindsight, could have been done?
    9. 9. Part II Sunk costs, optimism and planning fallacy
    10. 10. Sunk-costs Two tickets to the theater, one you paid 180 bucks for, your friend was given theirs for free…” The weather is going to be awful, who is more likely to cancel? “We’ve just spent 15k on a new roof, we can’t sell it…” “We founded the memory business, we are the memory company and it is half our revenues…” “If I am seen to give up now, the loss of face…” “Pulling out now would be a betrayal of those who gave their lives here…” “Things are beginning to turn in our favor…”
    11. 11. If that weren’t bad enough… • If I offer $950 dollars or a 1% shot at $100,000, most people take the $950 bucks – “risk-aversion” – trade $50 in EV for less risk • However, under stress, in difficult times… or where there are pre-existing losses, they do the opposite – People will even pay a premium – say if I offer either $1050 or 1% of $100k (“risk-seeking”)
    12. 12. The Planning Fallacy • College students were asked to estimate how long to complete a term paper a) if every thing went as well as possible, b) if everything went horribly wrong… – They answered an average of 27 for “a” and 49 for “b”… the average days to complete was 55.5
    13. 13. Research on major projects • 1471 projects studied by Bent Flyvberg at Oxford. • Average overrun 27% Be careful crossing a river that is an average of four feet deep! • Corporate culture deals in ‘averages’ or ‘best-case’ scenarios and neglects not just Black Swans, but the very fat tails in project planning… • One in six overran (costs) by 200% or more! • USAF - $1.2 bn, NHS (UK) - $20 bn, Big Dig ($12 bn), DIA ($3bn) • This applies to every single private sector systems implementation on which I’ve worked – not just huge government infrastructure.
    14. 14. Optimism • Put in a range where you are 90% confident of being correct… (while maintaining an interest in precision) • Neurons in human brain_____ ____ • Number of books in old testament _____ ____ • Length of the Nile river _____ _____ • Distance earth to the moon ____ _____ • 93% of US drivers claim to be “above average” (much less in other cultures, perhaps the dark side of US “can-do” attitude) • … all the men are strong, all the women good-looking, and all the kids above average… • It is not so much that we are incompetent (at estimation and probability), but that we are confident in our incompetence… (PG)
    15. 15. Hedgehogs • Philip Tetlock studied expert predictions for 25 years… (thousands of people at the top of their profession) – ‘will never happen’ happened 15% of the time – ‘sure thing’ failed to happened 25% of the time… • Hedgehogs… – A Big Idea, ideological, specialized, bold in speech and action • Foxes… – Self-critical, evidence based, broad knowledge, cautious • Ask yourself this question – who do we ask to lead? Promote? Vote for? • Given ‘biases’ as a context, is that wise?
    16. 16. Questions • Given this, it is more amazing to me that humans complete things like computers, cathedrals and canals! • Given most of this is poorly understood and less well implemented, where do you think solutions lie?
    17. 17. Part III What to do?
    18. 18. Consequences • Our entire economic system (macro and micro) is based on the assumption of Rational Economic Man – Our preferences are rational (we know what maximizes Utility for ourselves) – That are behaviors (rational) will aggregate toward desirable outcomes (the “sum” of rational self-interested behaviors produces a “whole” which maximizes utility) – That adverse outcomes will self-correct (in other words, no vicious circles – (bad decisions, bad outcomes, bad circumstances, restricted choices, bad decisions) • Or that self-correction will happen within timescales and within acceptable limits
    19. 19. Tentative ideas • Diagnose team culture “hedgehog” or “fox” • Include these understandings of human behavior in curricula (practitioners, facilitators, and advisors) • Stamp out “point” estimates in favor of confidence intervals in your company – never accept “this will take 3 months and cost $1.2 million dollars”, but insist upon a range (the entire budgeting and capital investment process will have to be reworked) • Humility… appreciate essential fallibility of people and human systems, build in fail-safes, learn! • Management (leadership) is one of the most difficult tasks one can undertake. Sadly, it is undertaken by people who pretend it is easy. (PG)
    20. 20. Book updates • • Or leave a card… • Chapter updates/ blogs on science and leadership • New book: Reboot Your Life (goal setting, personal vision and mission)