Overconfidence and optimism can lead strategists to back flawed strategies. Behavioral economics has identified biases that cause people to be overconfident in their abilities and estimates, which often results in strategies based on unrealistic assumptions. For example, many financial institutions believed their brands had above-average value and were overconfident in forecasts during the dot-com era. While overconfidence can drive success, it also increases the risk of betting on bad strategies. Strategists can counter this by testing strategies under a much wider range of scenarios rather than narrow ones.
Barry Ritholtz Presentation on Behavioral Economics (CFA Toronto 2013)Chand Sooran
A good introduction to key issues in behavioral economics from Barry Ritholtz in a presentation made to the CFA Toronto Group. Pithy, entertaining and informative.
Dissertation on behavioral finance and its impact on portfolio investment dec...Rahmatullah Pashtoon
Extreme volatility has plagued financial markets worldwide since the 2008 Global Crisis. Investor sentiment has been one of the key determinants of market movements. In this context, studying the role played by emotions like fear, greed and anticipation, in shaping up investment decisions seemed important. Behavioral Finance is an evolving field that studies how psychological factors affect decision making under uncertainty. This thesis seeks to find the influence of certain identified behavioral finance concepts (or biases), namely, Overconfidence, Representativeness, Herding, Anchoring, Cognitive Dissonance, Regret Aversion, Gamblers’
Fallacy, and Mental Accounting, on the decision making process of individual investors in the Indian Stock Market. Primary data for analysis was gathered by distributing a structured questionnaire among investors who were categorized as (i) young, and (ii) experienced. Results obtained by analyzing a sample of 74 respondents, out of which 12 admitted to having suffered a loss of at least 50% because of the crisis, revealed that the degree of exposure to the biases separated the behavioral pattern of young and experienced investors.
Gamblers’ Fallacy, Anchoring and Representative and Herding bias were seen to affect the young investors significantly more than experienced investors.
This is the presentation on brand strategy in turbulent socio-economic conditions that I gave at the 2011 Branding Conference in South Africa. A key part of the presentation was the use of scenario planning. I also spoke about Sagacite's work on rapid adaptive strategies. I have added a couple of notes to several of the more obscure slides to help viewers understand what I talking about.
Barry Ritholtz Presentation on Behavioral Economics (CFA Toronto 2013)Chand Sooran
A good introduction to key issues in behavioral economics from Barry Ritholtz in a presentation made to the CFA Toronto Group. Pithy, entertaining and informative.
Dissertation on behavioral finance and its impact on portfolio investment dec...Rahmatullah Pashtoon
Extreme volatility has plagued financial markets worldwide since the 2008 Global Crisis. Investor sentiment has been one of the key determinants of market movements. In this context, studying the role played by emotions like fear, greed and anticipation, in shaping up investment decisions seemed important. Behavioral Finance is an evolving field that studies how psychological factors affect decision making under uncertainty. This thesis seeks to find the influence of certain identified behavioral finance concepts (or biases), namely, Overconfidence, Representativeness, Herding, Anchoring, Cognitive Dissonance, Regret Aversion, Gamblers’
Fallacy, and Mental Accounting, on the decision making process of individual investors in the Indian Stock Market. Primary data for analysis was gathered by distributing a structured questionnaire among investors who were categorized as (i) young, and (ii) experienced. Results obtained by analyzing a sample of 74 respondents, out of which 12 admitted to having suffered a loss of at least 50% because of the crisis, revealed that the degree of exposure to the biases separated the behavioral pattern of young and experienced investors.
Gamblers’ Fallacy, Anchoring and Representative and Herding bias were seen to affect the young investors significantly more than experienced investors.
This is the presentation on brand strategy in turbulent socio-economic conditions that I gave at the 2011 Branding Conference in South Africa. A key part of the presentation was the use of scenario planning. I also spoke about Sagacite's work on rapid adaptive strategies. I have added a couple of notes to several of the more obscure slides to help viewers understand what I talking about.
Hero's and Mentors - The Hero's Journey in MentoringMowgli Foundation
This presentation represents part of a session about the benefits of mentoring to entrepreneurs. The session was presented at WAMDA's Celebration of Entrepreneurship 2010.
Conversations for Action is a key component of the training that Mowgli Foundation Mentors undertake. It enables complex communications to take place. These slides provide some examples of making clear offers, clear commitments making requests, declaring a breakdown and offering feedback and assessment.
The Psychology and Neuroscience of Financial Decision MakingTrading Game Pty Ltd
Financial decisions are among the most important life-shaping decisions that people make. We review facts about financial decisions and what cognitive and neural processes influence them. Because of cognitive constraints and a low average level of financial literacy, many household decisions violate sound
financial principles. Households typically have underdiversified stock holdings and low retirement savings rates. Investors overextrapolate from past returns and trade too often. Even top corporate managers, who are typically highly educated, make decisions that are affected by overconfidence and personal history. Many of these behaviors can be explained by well-known principles from cognitive science.
A boom in high-quality accumulated evidence–especially how practical, low-cost ‘nudges’ can improve financial decisions–is
already giving clear guidance for balanced government regulation
Capital biasReducing human error in capital decision-makingTawnaDelatorrejs
Capital bias
Reducing human error in capital decision-making
A report by the
Center for Integrated Research
Deloitte’s Capital Efficiency practice helps organizations make better and faster decisions by
assisting them in improving the quality of their capital allocation decisions to enhance robustness,
efficiency, and return on investment.
Capital bias
The balancing act | 2
Choreographing the optimism bias, expert bias,
and narrow framing | 3
Mitigating biases in planning: The US Navy | 7
Prioritization: Leveling the playing field | 9
Stripping away your own organization’s biases | 11
Endnotes | 12
CONTENTS
Reducing human error in capital decision-making
1
A look at the S&P 500 suggests just how dif-ficult it can be to consistently drive positive results. Take one measure, return on in-
vested capital (ROIC). In a Deloitte study, neither
the amount of capital expenditures (as a percentage
of revenue) nor the growth in capital expenditure
demonstrated any kind of meaningful correlation
with ROIC.1 Regardless of industry, individual com-
panies can often have a difficult time maintaining
high and steady returns on their investments year
over year.
Given such uncertainty in capital allocation re-
sults, it may not be surprising that more than 60
percent of finance executives say they are not con-
fident in their organization’s ability to optimally al-
locate capital.2 After all, many companies are bal-
ancing competing priorities, diverse stakeholder
interests, and a complex variety of proposals that
can make capital allocation decisions even more dif-
ficult to execute in practice.
Why is this? On paper it seems practical enough
for everyone throughout the organization to be on
the same page. In an ideal world, a company estab-
lishes the goals and priorities; then, from senior
managers to frontline employees, everyone is ex-
pected to act in a manner that supports these man-
dates.
However, behavioral science, and possibly your
own experience, suggest it’s likely not always that
simple. Individuals at any level of an organization
may be overly optimistic about certain courses of
action, rely too much on specific pieces of informa-
tion (and people), or simply interpret the objective
through too narrow a lens (that may even run coun-
ter to other views on how to achieve these goals).
Within the behavioral science field, these are
referred to as cognitive biases and they exist in
many endeavors, not just capital planning. These
same biases can explain why we are too optimistic
about our retirement portfolios, can rely solely on
the opinions of experts in matters of health, and
narrowly frame our car buying decisions based on
a single attribute, such as fuel efficiency—ignoring
safety features, price, and aesthetic design. In the
language of the behavioral sciences, these translate
into the optimism bias, expert bias, and narrow
framing, respectively.
Though these biases, an ...
Intelligence Solutions Design - ATELIS-ICI Keynote 20110407Arik Johnson
Slides from April 6, 2011 keynote speech by Arik Johnson, Founder & Chairman of Aurora WDC and Managing Director of the Center for Organizational Reconnaissance (COR) to the Institute for Competitive Intelligence / ATELIS Conference in Bad Nauheim, Germany
American Bankers Association Risk Management Forum April 29, 2010 Tyler D. ...tnunnally
American Bankers Association Risk Management Forum, April 29, 2010. Best Practices: Managing Judgment Risk. Presented by Tyler D. Nunnally, Founder & CEO, Upside Risk
Current Issues in Risk Management
Presenter: Stewart Hodges
Cass Business School
Fourth Annual Conference of the Cass-Capco Institute Paper Series on Risk
April 14, 2011
5 Things We Think We Know About Strategy -- And Why We're WrongEd Morrison
Strategic Doing is an agile strategy discipline for complex collaborations, open innovation and ecosystems. In the years that we took to develop the discipline, we learned a few myths about strategy that we'd like to share.
1242020 Scenario and Mega-Trend Model Scoring Guidehttps.docxaulasnilda
1/24/2020 Scenario and Mega-Trend Model Scoring Guide
https://courserooma.capella.edu/bbcswebdav/institution/BMGT/BMGT8132/190700/Scoring_Guides/u01a1_scoring_guide.html 1/1
Scenario and Mega-Trend Model Scoring Guide
Due Date: End of Unit 1
Percentage of Course Grade: 15%.
CRITERIA NON-PERFORMANCE BASIC PROFICIENT DISTINGUISHED
Evaluate scenario
planning and trend
convergence
theories, models,
and processes.
25%
Does not evaluate
scenario planning
and trend
convergence
theories, models,
and processes.
Evaluates some aspects
of scenario planning
and trend convergence
theories, models, and
processes from
references, research,
and personal
experiences. Analyzes
some themes and
concepts in the
literature.
Evaluates scenario
planning and trend
convergence theories,
models, and
processes from
references, research,
and personal
experiences.
Analyzes major
themes and concepts
in the literature.
Evaluates and
synthesizes scenario
planning and trend
convergence theories,
models, and processes
from references,
research, and personal
experiences. Analyzes
major themes and
concepts in the
literature.
Create and illustrate
a scenario planning
and trend
convergence model.
25%
Neither creates nor
illustrates a
scenario planning
and trend
convergence
model integrating
theoretical support.
Creates and illustrates a
scenario planning and
trend convergence
model. Includes some
aspects from activities,
roles, and
responsibilities, and
how and when activities
will be performed.
Creates and illustrates
a scenario planning
and trend
convergence model.
Includes a set of
activities, roles, and
responsibilities, and
how and when
activities will be
performed.
Creates and illustrates a
scenario planning and
trend convergence
model integrating
theoretical support.
Includes a set of
activities, roles, and
responsibilities, and how
and when activities will
be performed.
Develop an
approach to leading
and implementing a
scenario planning
and trend
convergence model.
25%
Does not develop
an approach to
leading and
implementing a
scenario planning
and trend
convergence
model.
Develops some aspects
of an approach to
leading and
implementing a scenario
planning and trend
convergence model.
Develops an
approach to leading
and implementing a
scenario planning and
trend convergence
model.
Develops a
comprehensive
approach to leading and
implementing a scenario
planning and trend
convergence model.
Communicate in a
scholarly and
professional
manner.
25%
Neither
communicates in a
manner expected
of doctoral-level
composition nor
exhibits critical
thinking skills:
grammar,
punctuation,
mechanics, APA
style and
formatting.
Communicates at a
basic level in a manner
expected of doctoral-
level composition, and
exhibits some critical
thinking skills.
Communicates in a
manner expected of
doctoral-level
composition, and
exhibits critical
thinking skills.
Communicates
exceptionally well in a
manner expected of a
doctoral-level
composition, and
exhibits exceptional
cr ...
Defining and Harnessing Plurality of Thought for the Digital AgeCognizant
Beyond and different from physical identity diversity, it is plurality of thought that must be cultivated and promoted within today's far-sighted organizations. We offer an analysis and roadmap for instilling plurality of thought on the individual, team and corporate levels.
BUS 475 Capstone Final Examination Part 1 : Business Question And Answer | UO...UOP E Help
We offer observe have a look at materials for BUS 475 Capstone Final Examination Part 1, BUS 475 Capstone Final Examination Part 1 Test Paper, UOP Business 475 Final Exam Solution, BUS 475 Capstone Final Examination Part 1 Questions and Answers, BUS 475 Complete Course, BUS 475 Complete Assignment for University Of Phoenix.
The retail environment is complicated, challenging and in many ways foreign. Think about viewing the retail environment through a prism. What used to be one homogeneous beam of light that large scale retailers and CPG companies could scale against has become a fractured spectrum of colors. No one really knows which color to chase first or how to take systems that were focused on a single beam and adapt them to chase more than one.
Numbers Rule Your World: The Hidden Influence of Probabilities and Statistics...McGraw-Hill Professional
NUMBERS RULE YOUR WORLD
In the popular tradition of eye-opening bestsellers like Freakonomics, The Tipping Point, and Super Crunchers, this fascinating book from renowned statistician and blogger Kaiser Fung takes you inside the hidden world of facts and figures that affect you every day, in every way.
These are the statistics that rule your life, your job, your commute, your vacation, your food, your health, your money, and your success. This is how engineers calculate your quality of living, how corporations determine your needs, and how politicians estimate your opinions. These are the numbers you never think about-even though they play a crucial role in every single aspect of your life.
What you learn may surprise you, amuse you, or even enrage you. But there's one thing you won't be able to deny: Numbers Rule Your World…
Hero's and Mentors - The Hero's Journey in MentoringMowgli Foundation
This presentation represents part of a session about the benefits of mentoring to entrepreneurs. The session was presented at WAMDA's Celebration of Entrepreneurship 2010.
Conversations for Action is a key component of the training that Mowgli Foundation Mentors undertake. It enables complex communications to take place. These slides provide some examples of making clear offers, clear commitments making requests, declaring a breakdown and offering feedback and assessment.
The Psychology and Neuroscience of Financial Decision MakingTrading Game Pty Ltd
Financial decisions are among the most important life-shaping decisions that people make. We review facts about financial decisions and what cognitive and neural processes influence them. Because of cognitive constraints and a low average level of financial literacy, many household decisions violate sound
financial principles. Households typically have underdiversified stock holdings and low retirement savings rates. Investors overextrapolate from past returns and trade too often. Even top corporate managers, who are typically highly educated, make decisions that are affected by overconfidence and personal history. Many of these behaviors can be explained by well-known principles from cognitive science.
A boom in high-quality accumulated evidence–especially how practical, low-cost ‘nudges’ can improve financial decisions–is
already giving clear guidance for balanced government regulation
Capital biasReducing human error in capital decision-makingTawnaDelatorrejs
Capital bias
Reducing human error in capital decision-making
A report by the
Center for Integrated Research
Deloitte’s Capital Efficiency practice helps organizations make better and faster decisions by
assisting them in improving the quality of their capital allocation decisions to enhance robustness,
efficiency, and return on investment.
Capital bias
The balancing act | 2
Choreographing the optimism bias, expert bias,
and narrow framing | 3
Mitigating biases in planning: The US Navy | 7
Prioritization: Leveling the playing field | 9
Stripping away your own organization’s biases | 11
Endnotes | 12
CONTENTS
Reducing human error in capital decision-making
1
A look at the S&P 500 suggests just how dif-ficult it can be to consistently drive positive results. Take one measure, return on in-
vested capital (ROIC). In a Deloitte study, neither
the amount of capital expenditures (as a percentage
of revenue) nor the growth in capital expenditure
demonstrated any kind of meaningful correlation
with ROIC.1 Regardless of industry, individual com-
panies can often have a difficult time maintaining
high and steady returns on their investments year
over year.
Given such uncertainty in capital allocation re-
sults, it may not be surprising that more than 60
percent of finance executives say they are not con-
fident in their organization’s ability to optimally al-
locate capital.2 After all, many companies are bal-
ancing competing priorities, diverse stakeholder
interests, and a complex variety of proposals that
can make capital allocation decisions even more dif-
ficult to execute in practice.
Why is this? On paper it seems practical enough
for everyone throughout the organization to be on
the same page. In an ideal world, a company estab-
lishes the goals and priorities; then, from senior
managers to frontline employees, everyone is ex-
pected to act in a manner that supports these man-
dates.
However, behavioral science, and possibly your
own experience, suggest it’s likely not always that
simple. Individuals at any level of an organization
may be overly optimistic about certain courses of
action, rely too much on specific pieces of informa-
tion (and people), or simply interpret the objective
through too narrow a lens (that may even run coun-
ter to other views on how to achieve these goals).
Within the behavioral science field, these are
referred to as cognitive biases and they exist in
many endeavors, not just capital planning. These
same biases can explain why we are too optimistic
about our retirement portfolios, can rely solely on
the opinions of experts in matters of health, and
narrowly frame our car buying decisions based on
a single attribute, such as fuel efficiency—ignoring
safety features, price, and aesthetic design. In the
language of the behavioral sciences, these translate
into the optimism bias, expert bias, and narrow
framing, respectively.
Though these biases, an ...
Intelligence Solutions Design - ATELIS-ICI Keynote 20110407Arik Johnson
Slides from April 6, 2011 keynote speech by Arik Johnson, Founder & Chairman of Aurora WDC and Managing Director of the Center for Organizational Reconnaissance (COR) to the Institute for Competitive Intelligence / ATELIS Conference in Bad Nauheim, Germany
American Bankers Association Risk Management Forum April 29, 2010 Tyler D. ...tnunnally
American Bankers Association Risk Management Forum, April 29, 2010. Best Practices: Managing Judgment Risk. Presented by Tyler D. Nunnally, Founder & CEO, Upside Risk
Current Issues in Risk Management
Presenter: Stewart Hodges
Cass Business School
Fourth Annual Conference of the Cass-Capco Institute Paper Series on Risk
April 14, 2011
5 Things We Think We Know About Strategy -- And Why We're WrongEd Morrison
Strategic Doing is an agile strategy discipline for complex collaborations, open innovation and ecosystems. In the years that we took to develop the discipline, we learned a few myths about strategy that we'd like to share.
1242020 Scenario and Mega-Trend Model Scoring Guidehttps.docxaulasnilda
1/24/2020 Scenario and Mega-Trend Model Scoring Guide
https://courserooma.capella.edu/bbcswebdav/institution/BMGT/BMGT8132/190700/Scoring_Guides/u01a1_scoring_guide.html 1/1
Scenario and Mega-Trend Model Scoring Guide
Due Date: End of Unit 1
Percentage of Course Grade: 15%.
CRITERIA NON-PERFORMANCE BASIC PROFICIENT DISTINGUISHED
Evaluate scenario
planning and trend
convergence
theories, models,
and processes.
25%
Does not evaluate
scenario planning
and trend
convergence
theories, models,
and processes.
Evaluates some aspects
of scenario planning
and trend convergence
theories, models, and
processes from
references, research,
and personal
experiences. Analyzes
some themes and
concepts in the
literature.
Evaluates scenario
planning and trend
convergence theories,
models, and
processes from
references, research,
and personal
experiences.
Analyzes major
themes and concepts
in the literature.
Evaluates and
synthesizes scenario
planning and trend
convergence theories,
models, and processes
from references,
research, and personal
experiences. Analyzes
major themes and
concepts in the
literature.
Create and illustrate
a scenario planning
and trend
convergence model.
25%
Neither creates nor
illustrates a
scenario planning
and trend
convergence
model integrating
theoretical support.
Creates and illustrates a
scenario planning and
trend convergence
model. Includes some
aspects from activities,
roles, and
responsibilities, and
how and when activities
will be performed.
Creates and illustrates
a scenario planning
and trend
convergence model.
Includes a set of
activities, roles, and
responsibilities, and
how and when
activities will be
performed.
Creates and illustrates a
scenario planning and
trend convergence
model integrating
theoretical support.
Includes a set of
activities, roles, and
responsibilities, and how
and when activities will
be performed.
Develop an
approach to leading
and implementing a
scenario planning
and trend
convergence model.
25%
Does not develop
an approach to
leading and
implementing a
scenario planning
and trend
convergence
model.
Develops some aspects
of an approach to
leading and
implementing a scenario
planning and trend
convergence model.
Develops an
approach to leading
and implementing a
scenario planning and
trend convergence
model.
Develops a
comprehensive
approach to leading and
implementing a scenario
planning and trend
convergence model.
Communicate in a
scholarly and
professional
manner.
25%
Neither
communicates in a
manner expected
of doctoral-level
composition nor
exhibits critical
thinking skills:
grammar,
punctuation,
mechanics, APA
style and
formatting.
Communicates at a
basic level in a manner
expected of doctoral-
level composition, and
exhibits some critical
thinking skills.
Communicates in a
manner expected of
doctoral-level
composition, and
exhibits critical
thinking skills.
Communicates
exceptionally well in a
manner expected of a
doctoral-level
composition, and
exhibits exceptional
cr ...
Defining and Harnessing Plurality of Thought for the Digital AgeCognizant
Beyond and different from physical identity diversity, it is plurality of thought that must be cultivated and promoted within today's far-sighted organizations. We offer an analysis and roadmap for instilling plurality of thought on the individual, team and corporate levels.
BUS 475 Capstone Final Examination Part 1 : Business Question And Answer | UO...UOP E Help
We offer observe have a look at materials for BUS 475 Capstone Final Examination Part 1, BUS 475 Capstone Final Examination Part 1 Test Paper, UOP Business 475 Final Exam Solution, BUS 475 Capstone Final Examination Part 1 Questions and Answers, BUS 475 Complete Course, BUS 475 Complete Assignment for University Of Phoenix.
The retail environment is complicated, challenging and in many ways foreign. Think about viewing the retail environment through a prism. What used to be one homogeneous beam of light that large scale retailers and CPG companies could scale against has become a fractured spectrum of colors. No one really knows which color to chase first or how to take systems that were focused on a single beam and adapt them to chase more than one.
Numbers Rule Your World: The Hidden Influence of Probabilities and Statistics...McGraw-Hill Professional
NUMBERS RULE YOUR WORLD
In the popular tradition of eye-opening bestsellers like Freakonomics, The Tipping Point, and Super Crunchers, this fascinating book from renowned statistician and blogger Kaiser Fung takes you inside the hidden world of facts and figures that affect you every day, in every way.
These are the statistics that rule your life, your job, your commute, your vacation, your food, your health, your money, and your success. This is how engineers calculate your quality of living, how corporations determine your needs, and how politicians estimate your opinions. These are the numbers you never think about-even though they play a crucial role in every single aspect of your life.
What you learn may surprise you, amuse you, or even enrage you. But there's one thing you won't be able to deny: Numbers Rule Your World…
A Pyramid ofDecision ApproachesPaul J.H. Schoemaker J. E.docxransayo
A Pyramid of
Decision Approaches
Paul J.H. Schoemaker J. Edward Russo
Nothing is more difficult, and therefore more precious, than to be able to decide.
—Napoleon Bonaparte {MoKims, 1804)
M
ost managers still make decisions based on intuition, despite
the risks. It's true that computers have improved information
gathering and display and that some routine decisions, such as
credit applications and inventory ordering, can be automated. But most
managerial decisions are still disturbingly immune to technological and
conceptual advances.
Managers know that decision making is more critical than ever; with
global competition, managers are competing against the best of the best.
Recent decision research has offered insights into improving managerial
decisions that were not available even a decade ago. But how can you incor-
porate some of those insights into the decisions that you, your colleagues,
and your subordinates make?
There are four general approaches to decision making, ranging from
intuitive to highly analytical.
William Goldstein, Robin Hogarth, Ralph Keeney, Joshua Klayman, John Quelch, and
Dick Wittlnk are acknowledged for their helpful comments. John C. Hershey and Howard
Kunreuther are thanked for supplying the PC software used in the demonstration experi-
men!. John Kirscher and Luke Knecht from the Harris Trust and Savings Bank are acknowl-
edged for sharing their bootstrapping experiences. We thank Allison Green for her fine
editing. None of the aforementioned bear any responsibility for errors.
•u:
10 CALIFORNIA MANAGEMENT REVIEW Fall 1993
Intuition
Many complain about their memory, few about their judgment.
—La Rochefoucauld
Intuition is quick and easy. It's hard to dispute decisions based on intuition
because the decision makers can't articulate the underlying reasoning.
People just know they're right, or they have a strong feeling about it, or
they're relying on "gut feel." Of course, if such a decision turns out to be
wrong, the decision maker has no defense.
Intuition can sometimes be brilliant. When based on extensive learning
from past experience, it may truly reflect "automated expertise."' Some
managers are so familiar with certain situations that they grasp the key
issues instantly and nearly automatically. However, they may have great
difficulty explaining their intuition. How much credibility can we give such
decisions? Decision research has revealed two common flaws in intuitive
decision making: random inconsistency and systematic distortion.
Inconsistency—Nine radiologists were independently shown information
from 96 cases of suspected stomach ulcers and asked to evaluate each case
in terms of the likelihood of a malignancy.- A week later, after these X-ray
specialists had forgotten the details of the 96 cases, they were presented
with the same ones again, but in a different order. A comparison of the ,
two sets of diagnoses showed a 23% chance that an opinion would be
changed.
People often apply c.
Missing Piece in MENA’s Entrepreneurship Ecosystem Puzzle Webinar PresentationMowgli Foundation
Further to the release of our recent report, “Nurturing Human Capital: the Missing Piece of MENA’s Entrepreneurship Puzzle”, we hosted a webinar which was chaired by Tony Bury, Mowgli’s Founder and Chairman. Tony shared our thoughts and insights from the report and created an active dialogue around this key missing piece of the puzzle.
Mowgli: The Power of Mentorship_SME Advisor Magazine article_Dubai_October 2012Mowgli Foundation
Mowgli recently held a Mowgli Jam, quarterly get together between mentors and entrepreneurs, in Dubai where Tony Bury, Mowgli's Founder, shared his thoughts on why mentoring is so important, especially for entrepreneurs and why it it is so important for the MENA region. Mowgli Entrepreneurs and Mentors then shared their stories and journey with the audience...bringing Mowgl's mission to life!
The typical Mowgli Mentoring Experience (MME) commences with a 3-day workshop which includes 1 day of mentor training, 1 day of mentor and entrepreneur matching and 1 day of facilitated mentoring relationship building, followed by a year of on-going support and supervision.
Free speed mentoring event for business owners and aspiring entrepreneurs. The event will give group and one-to-one opportunities to discuss your business issues.
In November 2010 the Mowgli Foundation matched 7 entrepreneurs with 7 mentors, facilitating 1-year mentoring relationships.This was our UK pilot programme, launched after delivering many successful programmes in the Middle East. The results point to the positive impact of mentoring.
Mowgli Foundation: Call for Palestine Business Mentors! 14-15 April 2012. Mowgli, a charity who supports small enterprises, is now recruiting participants for their first Palestine mentoring programmes. Read the below and apply!
Flavrbox was born in 2011, a project which combines Sebastien’s interest in communications with his passion for sustainable local produce. Flavrbox is a platform to champion independent food producers through e-commerce, giving people an opportunity to connect with the high quality food available in their communities. Sebastien feels Mowgli mentoring could be of most benefit for him in his role at Flavrbox.
Mowgli Foundation: Mentoring Entrepreneurs for LearningMowgli Foundation
The Mowgli Foundation team have put together a research briefing summarising some relevant research into mentoring for entrepreneurs. We hope you find it useful.
Mowgli Foundation's South West mentoring programmes for entrepreneurs are covered in the Bristol Evening Post, Bristol, UK. Featuring Rob Salvidge and Tristan Hogg.
Tony Bury Presentation: Family Forum International 2011Mowgli Foundation
Family businesses dominate the Middle East. There are numerous challenges in sustaining the growth of these businesses. Tony Bury, founder of the Mowgli Foundation (a mentoring organisation for entrepreneurs) suggests in this presentation to Family Forum International that injecting a spirit of entrepreneurship is the key to passing businesses from generation to generation in the Arab World.
Tony Bury Presentation: Family Forum International 2011
Hidden flaws in strategy
1. Q2_Strategy_v6 3/4/03 12:56 PM Page 26
WALTER VASCONCELOS
2. Q2_Strategy_v6 3/4/03 12:56 PM Page 27
27
Hidden flaws
in strategy
Charles Roxburgh
Can insights from behavioral economics explain why good executives
back bad strategies?
A fter nearly 40 years, the theory of business strategy is well devel-
oped and widely disseminated. Pioneering work by academics such
as Michael E. Porter and Henry Mintzberg has established a rich literature
on good strategy. Most senior executives have been trained in its principles,
and large corporations have their own skilled strategy departments.
Yet the business world remains littered with examples of bad strategies.
Why? What makes chief executives back them when so much know-how is
available? Flawed analysis, excessive ambition, greed, and other corporate
vices are possible causes, but this article doesn’t attempt to explore all of
them. Rather, it looks at one contributing factor that affects every strategist:
the human brain.
The brain is a wondrous organ. As scientists uncover more of its inner work-
ings through brain-mapping techniques,1 our understanding of its astonish-
ing abilities increases. But the brain isn’t the rational calculating machine
we sometimes imagine. Over the millennia of its evolution, it has developed
shortcuts, simplifications, biases, and basic bad habits. Some of them may
have helped early humans survive on the savannas of Africa (“if it looks like
a wildebeest and everyone else is chasing it, it must be lunch”), but they
create problems for us today. Equally, some of the brain’s flaws may result
from education and socialization rather than nature. But whatever the root
cause, the brain can be a deceptive guide for rational decision making.
1
See Rita Carter, Mapping the Mind, London: Phoenix, 2000.
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These implications of the brain’s inadequacies have been rigorously studied
by social scientists and particularly by behavioral economists, who have
found that the underlying assumption behind modern economics—human
beings as purely rational economic decision makers—doesn’t stack up
against the evidence. As most of the theory underpinning business strategy
is derived from the rational world
of microeconomics, all strategists
The basic assumption of modern should be interested in behavioral
economics—rationality—does economics.
not stack up against the evidence
Insights from behavioral economics
have been used to explain bad deci-
sion making in the business world,2 and bad investment decision making
in particular. Some private equity firms have successfully remodeled their
investment processes to counteract the biases predicted by behavioral eco-
nomics. Likewise, behavioral economics has been applied to personal
finance,3 thereby providing an easier route to making money than any hot
stock tip. However, the field hasn’t permeated the day-to-day world of strat-
egy formulation.
This article aims to help rectify that omission by highlighting eight4 insights
from behavioral economics that best explain some examples of bad strategy.
Each insight illustrates a common flaw that can draw us to the wrong con-
clusions and increase the risk of betting on bad strategy. All the examples
come from a field with which I am familiar—European financial services—
but equally good ones could be culled from any industry.
Several examples come from the dot-com era, a particularly rich period for
students of bad strategy. But don’t make the mistake of thinking that this
was an era of unrepeatable strategic madness. Behavioral economics tells
us that the mistakes made in the late 1990s were exactly the sorts of errors
our brains are programmed to make—and will probably make again.
Flaw 1: Overconfidence
Our brains are programmed to make us feel overconfident. This can be a
good thing; for instance, it requires great confidence to launch a new busi-
2
See, for example, J. Edward Russo and Paul J. H. Schoemaker, Decision Traps: The Ten Barriers to
Brilliant Decision-Making and How to Overcome Them, New York: Fireside, 1990; and John S.
Hammond III, Ralph L. Keeney, and Howard Raiffa, “The hidden traps in decision making,” Harvard
Business Review, September–October 1998, pp. 47 .
–57
3
See Gary Belsky and Thomas Gilovich, Why Smart People Make Big Money Mistakes and How to
Correct Them, New York: Simon and Schuster, 1999.
4
This is far from a complete list of all the flaws in the way we make decisions. For a full description of
the irrational biases in decision making, see Jonathan Baron, Thinking and Deciding, New York:
Cambridge University Press, 1994.
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H I D D E N F L A W S I N S T R AT E G Y 29
ness. Only a few start-ups will become highly successful. The world would
be duller and poorer if our brains didn’t inspire great confidence in our own
abilities. But there is a downside when it comes to formulating and judging
strategy.
The brain is particularly overconfident of its ability to make accurate esti-
mates. Behavioral economists often illustrate this point with simple quizzes:
guess the weight of a fully laden jumbo jet or the length of the River Nile,
say. Participants are asked to offer not a precise figure but rather a range in
which they feel 90 percent confidence—for example, the Nile is between
2,000 and 10,000 miles long. Time and again, participants walk into the
same trap: rather than playing safe with a wide range, they give a narrow
one and miss the right answer. (I scored 0 out of 15 on such a test, which
was one of the triggers of my interest in this field!) Most of us are unwilling
and, in fact, unable to reveal our ignorance by specifying a
very wide range. Unlike John Maynard Keynes, most of us
prefer being precisely wrong rather than vaguely right.
We also tend to be overconfident of our own abilities.5
This is a particular problem for strategies based on
assessments of core capabilities. Almost all financial
institutions, for instance, believe their brands to be of
“above-average” value.
Related to overconfidence is the problem of overopti-
mism. Other than professional pessimists such as
financial regulators, we all tend to be optimistic, and our forecasts tend
toward the rosier end of the spectrum. The twin problems of overconfidence
and overoptimism can have dangerous consequences when it comes to
developing strategies, as most of them are based on estimates of what may
happen—too often on unrealistically precise and overoptimistic estimates
of uncertainties.
One leading investment bank sensibly tested its strategy against a pessimistic
scenario—the market conditions of 1994, when a downturn lasted about
nine months—and built in some extra downturn. But this wasn’t enough.
The 1994 scenario looks rosy compared with current conditions, and the
bank, along with its peers, is struggling to make dramatic cuts to its cost
base. Other sectors, such as banking services for the affluent and on-line
brokerages, are grappling with the same problem.
There are ways to counter the brain’s overconfidence:
5
In a 1981 survey, for example, 90 percent of Swedes described themselves as above-average drivers.
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1. Test strategies under a much wider range of scenarios. But don’t give
managers a choice of three, as they are likely to play safe and pick the
central one. For this reason, the pioneers of scenario planning at Royal
Dutch/Shell always insisted on a final choice of two or four options.6
2. Add 20 to 25 percent more downside to the most pessimistic scenario.7
Given our optimism, the risk of getting pessimistic scenarios wrong is
greater than that of getting the upside wrong. The Lloyd’s of London
insurance market—which has learned these lessons the hard, expensive
way—makes a point of testing the market’s solvency under a series of
extreme disasters, such as two 747 aircraft colliding over central London.
Testing the resilience of Lloyd’s to these conditions helped it build its
reserves and reinsurance to cope with the September 11 disaster.
3. Build more flexibility and options into your strategy to allow the company
to scale up or retrench as uncertainties are resolved. Be skeptical of strate-
gies premised on certainty.
Flaw 2: Mental accounting
Richard Thaler, a pioneer of behavioral economics, coined the term “mental
accounting,” defined as “the inclination to categorize and treat money differ-
ently depending on where it comes from, where it is kept, and how it is
spent.”8 Gamblers who lose their winnings, for example, typically feel that
they haven’t really lost anything, though they would have been richer had
they stopped while they were ahead.
Mental accounting pervades the boardrooms of even the most conservative
and otherwise rational corporations. Some examples of this flaw include the
following:
• being less concerned with value for money on expenses booked against a
restructuring charge than on those taken through the P&L
• imposing cost caps on a core business while spending freely on a start-up
• creating new categories of spending, such as “revenue-investment spend”
or “strategic investment”
6
See Pierre Wack’s two-part article, “Scenarios: Uncharted waters ahead,” Harvard Business Review,
September–October 1985, pp. 73–89; and “Scenarios: Shooting the rapids,” Harvard Business
Review, November–December 1985, pp. 139–50.
7
This rule of thumb was suggested by Belsky and Gilovich in Why Smart People Make Big Money
Mistakes and How to Correct Them.
8
See Belsky and Gilovich.
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H I D D E N F L A W S I N S T R AT E G Y 31
All are examples of spending that tends to be less scrutinized because of the
way it is categorized, but all represent real costs.
These delusions can have serious strategic implications. Take cost caps. In
some UK financial institutions during the dot-com era, core retail businesses
faced stringent constraints on their ability to invest, however sound the pro-
posal, while start-up Internet businesses spent with abandon. These banks
have now written off much of their
loss from dot-com investment and
must reverse their underinvestment Make sure that all investments are
in core businesses. judged on consistent criteria, and
be wary of spending that has been
Avoiding mental accounting traps reclassified to make it acceptable
should be easier if you adhere to a
basic rule: that every pound (or
dollar or euro) is worth exactly that, whatever the category. In this way, you
will make sure that all investments are judged on consistent criteria and be
wary of spending that has been reclassified. Be particularly skeptical of any
investment labeled “strategic.”
Flaw 3: The status quo bias
In one classic experiment,9 students were asked how they would invest a
hypothetical inheritance. Some received several million dollars in low-risk,
low-return bonds and typically chose to leave most of the money alone. The
rest received higher-risk securities—and also left most of the money alone.
What determined the students’ allocation in this experiment was the initial
allocation, not their risk preference. People would rather leave things as they
are. One explanation for the status quo bias is aversion to loss—people are
more concerned about the risk of loss than they are excited by the prospect
of gain. The students’ fear of switching into securities that might end up
losing value prevented them from making the rational choice: rebalancing
their portfolios.
A similar bias, the endowment effect, gives people a strong desire to hang on
to what they own; the very fact of owning something makes it more valuable
to the owner. Richard Thaler tested this effect with coffee mugs imprinted
with the Cornell University logo. Students given one of them wouldn’t part
with it for less than $5.25, on average, but students without a mug wouldn’t
pay more than $2.75 to acquire it. The gap implies an incremental value of
$2.50 from owning the mug.
9
This is a simplified account of an experiment conducted by William Samuelson and Richard Zeck-
hauser, described in “Status-quo bias in decision making,” Journal of Risk and Uncertainty, 1, March
1988, pp. 7–59.
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The status quo bias, the aversion to loss, and the endowment effect con-
tribute to poor strategy decisions in several ways. First, they make CEOs
reluctant to sell businesses. McKinsey research shows that divestments are a
major potential source of value creation but a largely neglected one.10 CEOs
are prone to ask, “What if we sell for too little—how stupid will we look
when this turns out to be a great buy for the acquirer?” Yet successful turn-
arounds, such as the one at Bankers Trust in the 1980s, often require a deter-
mined break with the status quo and an extensive
reshaping of the portfolio—in that case, selling all
of the bank’s New York retail branches.
These phenomena also make it hard for companies
to shift their asset allocations. Before the recent
market downturn, the UK insurer Prudential
decided that equities were overvalued and made the
bold decision to rebalance its fund toward bonds.
Many other UK life insurers, unwilling to break with
the status quo, stuck with their high equity weight-
ings and have suffered more severe reductions in their
solvency ratios.
This isn’t to say that the status quo is always wrong.
Many investment advisers would argue that the best
long-term strategy is to buy and hold equities (and, behavioral economists
would add, not to check their value for many years, to avoid feeling bad
when prices fall). In financial services, too, caution and conservatism can
be strategic assets. The challenge for strategists is to distinguish between a
status quo option that is genuinely the right course and one that feels decep-
tively safe because of an innate bias.
To make this distinction, strategists should take two approaches:
1. Adopt a radical view of all portfolio decisions. View all businesses as
“up for sale.” Is the company the natural parent, capable of extracting
the most value from a subsidiary? View divestment not as a failure but
as a healthy renewal of the corporate portfolio.
2. Subject status quo options to a risk analysis as rigorous as change options
receive. Most strategists are good at identifying the risks of new strategies
but less good at seeing the risks of failing to change.
10
See Lee Dranikoff, Tim Koller, and Antoon Schneider, “Divestiture: Strategy’s missing link,” Harvard
Business Review, May–June 2002, pp. 75–83; and Richard N. Foster and Sarah Kaplan, Creative
Destruction: Why Companies That Are Built to Last Underperform the Market—and How to Successfully
Transform Them, New York: Currency/Doubleday, 2001.
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H I D D E N F L A W S I N S T R AT E G Y 33
Flaw 4: Anchoring
One of the more peculiar wiring flaws in the brain is called anchoring.
Present the brain with a number and then ask it to make an estimate of
something completely unrelated, and it will anchor its estimate on that first
number. The classic illustration is the Genghis Khan date test. Ask a group
of people to write down the last three digits of their phone numbers, and
then ask them to estimate the date of Genghis Khan’s death. Time and again,
the results show a correlation between the two numbers; people assume that
he lived in the first millennium, when
in fact he lived from 1162 to 1227.
Anchoring can be dangerous —
Anchoring can be a powerful tool for particularly when it is a question of
strategists. In negotiations, naming a becoming anchored to the past
high sale price for a business can help
secure an attractive outcome for the
seller, as the buyer’s offer will be anchored around that figure. Anchoring
works well in advertising too. Most retail-fund managers advertise their
funds on the basis of past performance. Repeated studies have failed to show
any statistical correlation between good past performance and future perfor-
mance. By citing the past-performance record, though, the manager anchors
the notion of future top-quartile performance to it in the consumer’s mind.
However, anchoring—particularly becoming anchored to the past—can
be dangerous. Most of us have long believed that equities offer high real
returns over the long term, an idea anchored in the experience of the past
two decades. But in the 1960s and 1970s, UK equities achieved real annual
returns of only 3.3 and 0.4 percent, respectively. Indeed, they achieved
double-digit real annual returns during only 4 of the past 13 decades. Our
expectations about equity returns have been seriously distorted by recent
experience.
In the insurance industry, changes in interest rates have caused major prob-
lems due to anchoring. The United Kingdom’s Equitable Life Assurance
Society assumed that high nominal interest rates would prevail for decades
and sold guaranteed annuities accordingly. That assumption had severe
financial consequences for the company and its policyholders. The banking
industry may now be entering a period of much higher credit losses than it
experienced during the past decade. Some banks may be caught out by the
speed of change.
Besides remaining unswayed by the anchoring tactics of others, strategists
should take a long historical perspective. Put trends in the context of the
past 20 or 30 years, not the past 2 or 3; for certain economic indicators,
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such as equity returns or interest rates, use a very long time series of 50 or
75 years. Some commentators who spotted the dot-com bubble early did so
by drawing comparisons with previous technology bubbles—for example,
the uncannily close parallels between radio stocks in the 1920s and Internet
stocks in the 1990s.
Flaw 5: The sunk-cost effect
A familiar problem with investments is called the sunk-cost effect, otherwise
known as “throwing good money after bad.” When large projects overrun
their schedules and budgets, the original economic case no longer holds, but
companies still keep investing to complete them.
Financial institutions often face this dilemma over large-scale IT projects.
There are numerous examples, most of which remain private. One of the
more public cases was the London Stock Exchange’s
automated-settlement system, Taurus. It took the inter-
vention of the Bank of England to force a cancellation,
write off the expenses, and take control of building a
replacement.
Executives making strategic-investment decisions can
also fall into the sunk-cost trap. Certain European
banks spent fortunes building up large equities busi-
nesses to compete with the global investment-banking
firms. It then proved extraordinarily hard for some of
these banks to face up to the strategic reality that they
had no prospect of ever competing successfully against
the likes of Goldman Sachs, Merrill Lynch, and Morgan Stan-
ley in the equities business. Some banks in the United Kingdom took the
agonizing decision to write off their investments; other European institu-
tions are still caught in the trap.
Why is it so hard to avoid? One explanation is based on loss aversion: we
would rather spend an additional $10 million completing an uneconomic
$110 million project than write off $100 million. Another explanation relies
on anchoring: once the brain has been anchored at $100 million, an addi-
tional $10 million doesn’t seem so bad.
What should strategists do to avoid the trap?
1. Apply the full rigor of investment analysis to incremental investments,
looking only at incremental prospective costs and revenues. This is the
textbook response to the sunk-cost fallacy, and it is right.
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H I D D E N F L A W S I N S T R AT E G Y 35
2. Be prepared to kill strategic experiments early. In an increasingly uncer-
tain world, companies will often pursue several strategic options.11 Suc-
cessfully managing a portfolio of them entails jettisoning the losers. The
more quickly you get out, the lower the sunk costs and the easier the exit.
3. Use “gated funding” for strategic investments, much as pharmaceutical
companies do for drug development: release follow-on funding only once
strategic experiments have met previously agreed targets.
Flaw 6: The herding instinct
The banking industry, like many others, shows a strong herding instinct. It
tends to lend too much money to the same kinds of borrowers at the same
time—to UK property developers in the 1970s, less-developed countries in
the 1980s, and technology, media, and telecommunications companies more
recently. And banks tend to pursue the same strategies, be it creating Inter-
net banks with strange-sounding names during the dot-com boom or build-
ing integrated investment banks at the time of the “big bang,” when the
London stock market was liberalized.
This desire to conform to the behavior and opinions of others is a funda-
mental human trait and an accepted principle of psychology.12 Warren
Buffett put his finger on this flaw when he wrote, “Failing conventionally is
the route to go; as a group, lemmings may have a rotten image, but no indi-
vidual lemming has ever received bad press.”13 For most CEOs, only one
thing is worse than making a huge strategic mistake: being the only person
in the industry to make it.
We all felt the tug of the herd during the dot-com era. It was lonely being a
Luddite, arguing the case against setting up a stand-alone Internet bank or
an on-line brokerage. At times of mass enthusiasm for a strategic trend, pres-
sure to follow the herd rather than rely on one’s own information and analy-
sis is almost irresistible. Yet the best strategies break away from the trend.
Some actions may be necessary to match the competition—imagine a bank
without ATMs or a good on-line banking offer. But these are not unique
sources of strategic advantage, and finding such sources is what strategy is
all about. “Me-too” strategies are often simply bad ones.14 Seeking out the
11
See Eric D. Beinhocker, “Robust adaptive strategies,” Sloan Management Review, spring 1999, pp.
95–106; Hugh Courtney, Jane Kirkland, and Patrick Viguerie, “Strategy under uncertainty,” Harvard
Business Review, November–December 1997 pp. 67–79; and Lowell L. Bryan, “Just-in-time strategy
,
for a turbulent world,” The McKinsey Quarterly, 2002 Number 2 special edition: Risk and resilience,
pp. 16–27 (www.mckinseyquarterly.com/links/4916).
12
See Belsky and Gilovich.
13
Warren Buffett, “Letter from the chairman,” Berkshire Hathaway Annual Report, 1984.
14
See Philipp M. Nattermann, “Best practice ≠ best strategy,” The McKinsey Quarterly, 2000 Number 2,
pp. 22–31 (www.mckinseyquarterly.com/links/5189).
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new and the unusual should therefore be the strategist’s aim. Rather than
copying what your most established competitors are doing, look to the
periphery15 for innovative ideas, and look outside your own industry.
Initially, an innovative strategy might draw skepticism from industry experts.
They may be right, but as long as you kill a failing strategy early, your losses
will be limited, and when they are wrong, the rewards will be great.
Flaw 7: Misestimating future hedonic states
What does it mean, in plain English, to misestimate future hedonic states?
Simply that people are bad at estimating how much pleasure or pain they
will feel if their circumstances change dramatically. Social scientists have
shown that when people undergo major changes in cir-
cumstances, their lives typically are neither as bad nor as
good as they had expected—another case of how bad we
are at estimating. People adjust surprisingly quickly, and
their level of pleasure (hedonic state) ends up, broadly,
where it was before.
This research strikes a chord with anyone who has
studied compensation trends in the investment-banking
industry. Ever-higher compensation during the 1990s
led only to ever-higher expectations—not to a marked
change in the general level of happiness on the Street.
According to Tom Wolfe’s Sherman McCoy, in Bonfire
of the Vanities, it was hard to make ends meet in New York on $1 million
a year in 1987. Back then, that was shocking hubris from a (fictional) top
bond salesman. By 2000, even adjusted for inflation, it would have seemed
a perfectly reasonable lament from a relatively junior managing director.
Another illustration of our poor ability to judge future hedonic states in
the business world is the way we deal with a loss of independence. More
often than not, takeovers are seen as the corporate equivalent of death, to
be avoided at all costs. Yet sometimes they are the right move. Two once
great British banks—Midland and National Westminster—both struggled
to maintain their independence. Midland gave in to HSBC’s advances in
1992; NatWest was taken over by the Royal Bank of Scotland in 2000. At
both institutions, the consequences were positive for customers, sharehold-
ers, and most employees on any test of the “greatest good of the greatest
number.” The employees ended up being part of better-managed, stronger,
more respected institutions. Morale at NatWest has gone up. Midland has
15
See Foster and Kaplan.
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achieved what was, for an independent bank, an unrealistic goal: to become
part of a great global bank.
Often, top management is blamed for resisting any loss of independence.
Certainly part of the problem is the desire of managements and boards to
hang on to the status quo. That said, frontline staff members often resist a
takeover or merger however much they are frustrated with the existing top
management. Some deeper psychological factor appears to be at work. We
do seem very bad at estimating how we would feel if our circumstances
changed dramatically—changes in corporate control, like changes in our
personal health or wealth.
How can the strategist avoid this pitfall?
1. In takeovers, adopt a dispassionate and unemotional view. Easier said than
done—especially for a management team with years of committed service
to an institution and a personal stake in the status quo. Nonexecutives,
however, should find it easier to maintain a detached view.
2. Keep things in perspective. Don’t overreact to apparently deadly strategic
threats or get too excited by good news. During the high and low points
of the crisis at Lloyd’s of London in the mid-1990s, the chairman used to
quote Field Marshall Slim—“In battle nothing is ever as good or as bad as
the first reports of excited men would have it.” This is a good guide for
every strategist trying to navigate a crisis, with the inevitable swings in
emotion and morale.
Flaw 8: False consensus
People tend to overestimate the extent to which others share their views,
beliefs, and experiences—the false-consensus effect. Research shows many
causes, including these:
• confirmation bias, the tendency to seek out opinions and facts that sup-
port our own beliefs and hypotheses
• selective recall, the habit of remembering only facts and experiences that
reinforce our assumptions
• biased evaluation, the quick acceptance of evidence that supports our
hypotheses, while contradictory evidence is subjected to rigorous evalua-
tion and almost certain rejection; we often, for example, impute hostile
motives to critics or question their competence
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• groupthink,16 the pressure to agree with others in team-based cultures
Consider how many times you may have heard a CEO say something like,
“the executive team is 100 percent behind the new strategy” (groupthink);
“the chairman and the board are fully supportive and they all agree with
our strategy” (false consensus);
“I’ve heard only good things from
False consensus often leads dealers and customers about our
strategists to overlook important new product range” (selective
threats to their companies and to recall); “OK, so some analysts are
persist with doomed strategies still negative, but those ‘teenage
scribblers’ don’t understand our
business—their latest reports were
superficial and full of errors” (biased evaluation). This hypothetical CEO
might be right but more likely is heading for trouble. The role of any strate-
gic adviser should be to provide a counterbalance to this tendency toward
false consensus. CEOs should welcome the challenge.
False consensus, which ranks among the brain’s most pernicious flaws, can
lead strategists to miss important threats to their companies and to persist
with doomed strategies. But it can be extremely difficult to uncover—espe-
cially if those proposing a strategy are strong role models. We are easily
influenced by dominant individuals and seek to emulate them. This can be
a force for good if the role models are positive. But negative ones can prove
an irresistible source of strategic error.
Many of the worst financial-services strategies can be attributed to over-
dominant individuals. The failure of several Lloyd’s syndicates in the 1980s
and 1990s was due to powerful underwriters who controlled their own
agencies. And overdominant individuals are associated with several more
recent insurance failures. In banking, one European institution struggled
to impose effective risk disciplines because its seemingly most successful
employees were, in the eyes of junior staff, cavalier in their approach to com-
pliance. Their behavior set the tone and created a culture of noncompliance.
The dangers of false consensus can be minimized in several ways:
1. Create a culture of challenge. As part of the strategic debate, management
teams should value open and constructive criticism. Criticizing a fellow
director’s strategy should be seen as a helpful, not a hostile, act. CEOs
and strategic advisers should understand criticisms of their strategies, seek
16
Famously described in Irving Lester Janis’s study of the Bay of Pigs and Cuban missile crises,
among others. See his book Groupthink: Psychological Studies of Policy Decisions and Fiascoes,
Boston: Houghton Mifflin, June 1982.