- A Guide to Making Great Strategic Decisions

Group Members: Falak Zubair Khan - 11819 Saman Zulfiqar - 11430 Shafaq Salim - 11757 Tooba Iqbal - 11501

We would like to thank our course instructor Ms. Shagufta Rafif for us assigning such an interesting project, which enhanced our research skills.

This article has been written by Daniel Kahneman, Dan Lovallo, and Olivier Sibony and was published in the Harvard Business Review of June 2011.
Harvard Business Review - June 2011 Edition.

"Stay committed to your decisions, but stay flexible in your approach." - Tony Robbins

This case discusses the errors managers make while making a decision. Most common errors are: Confirmation Bias: The tendency to seek out information that reaffirm past choices and to discount information that contradicts past judgment.

Anchoring Bias: A tendency to fixate on initial information, and fails to adequately adjust for subsequent information.

Loss Aversion: Refers to people's tendency to strongly prefer avoiding losses to acquiring gains. It implies that one who loses $100 will lose more satisfaction than another person will gain satisfaction from a $100 windfall.

According to Cognitive scientists, there are two modes of thinking, intuitive and reflective.
System One produces a constant representation of the world around us and allows us to do things that we are not consciously focusing on, we just do them.

In System Two, thinking is slow, effortful and deliberate. It is typically monitoring things and is mobilized when we detect an obvious error or when rule-based reasoning is required.

The author discussed the experiences of three corporate executives - Bob, Lisa and Devesh, who were asked to consider very different kind of proposals.

Bob is the vice president of sales in a business services company. Recently, his senior regional VP and several colleagues recommended a total overhaul of the company's pricing structure.

They argued that the company had lost a number of bids to competitors, as well as some of its best salespeople, because of unsustainable price levels but making the wrong move could be very costly.

 Lisa is the Chief Financial Officer

of a capital-intensive manufacturing company.

The VP of manufacturing has proposed a substantial investment in one of the manufacturing site. The request is accompanied with proper research. But the investment would be a very large one- in a business that has been losing money for some time.

 Devesh is the CEO of a diversified

industrial company.
His business development team

has proposed purchasing a firm whose offerings would complement the product line in one of the company's core businesses.
However, the potential stretches

the companys financial structure.

The authors have devised a 12-question checklist to help managers examine whether a team has explored alternatives appropriately, and gathered all the right information. These 12 questions were divided in three categories: Questions that the decision makers should ask themselves, Questions they should use to challenge the people proposing the course of action, and Questions aimed at evaluating the proposal.

Questions that the decision makers should ask themselves

This is based on the principle of self interest. Self interest is taking advantage of opportunities without regard for the consequence of others. For e.g. Bob who is vice president of sales in a company should consider the impact that his decision will have on the commissions of his sales team-if bonuses are paid on revenues

This question talks about affect heuristics. The affect heuristic is a principle for making fast, perceptual judgments based on impressions of goodness/badness. For e.g. Devesh when deciding an acquisition should see whether his business development team is under affect heuristic. Is the team making decisions only keeping in mind the benefits the acquisition will have on one of its product line and not considering other merger risks and financial implications

It is possible that when making decisions in a group that the group pressures for conformity. This phenomenon is called groupthink and can hinder performance. Groupthink is especially likely if there is little diversity of background and viewpoint within a team.

Questions Used to challenge the team making recommendations

saliency bias occurs when the decisions are overly influenced by an analogy or association to a memorable success.

For e.g. the business development team advocating the acquisition to Devesh might be a possibility that they have been influenced by a recent successful deal of acquisition.

the danger is that the analogy may be less relevant to the current deal and can lead to misleading directions in decision making.

When trying to solve a problem, individuals and groups tend to gather information selectively and only seek evidence that supports their decision. This is an example of confirmation bias.

Confirmation bias is selecting and using only those facts that support our decision and only selecting information that the decision maker wants to.

A good practice is to consider all the alternatives for e.g. Bob should consider other options such as a targeted marketing campaign or to use promotional strategies.

One challenge executives face when reviewing a recommendation is the What you see is all there is assumption.

Because our intuitive mind constructs a coherent narrative based on the evidence, we tend to overlook what is missing.

Devesh for instance, found the acquisition proposal compelling but he overlooked all the legal requirements.

In this case Devesh should have checked for availability bias which is that if his employees had to make this decision in a year's time, what information would they want and can they get more of it now?

They should use a checklist of the data needed for each kind of decision.

7. Do you know where the numbers came from?

Anchoring Bias- occurs when the individual overly rely on a specific piece of information to govern their thought process Types for Anchoring bias in business decisions:

Best Guess Extrapolations from history

Deliberate anchoring

8. Can you see a halo effect?

Halo effect is the perception of one trait which is influenced by the perception of another trait Simple practice should be to first assess the relevance of the comparison.

9. Are the people making the recommendation overly attached to past decisions? Sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered.

QUESTIONS FOCUSED ON EVALUATING THE PROPOSAL

10. Is the base case overly optimistic? Overconfidence- overestimation of ability
Planning Fallacy- overestimation

of rate of work or underestimation to get things done

Failure to anticipate about

response

11. Is the worst case bad enough? Scenarios for bad or worst case Premortem (imagine the worst condition and make up a story)
12. Is the recommending team overly cautious? Loss Aversion- People generally prefer to avoid losses rather than gaining profits Explicit choices about what level of risk they will assume

 Review the recommendations systematically before

finalizing or locking the decision.

Careful monitoring enhances the quality of the

decision

Is it important to use the check list when need. We can not use the check list in every situation The checklist should be use in a systematic approach rather than using it carelessly.

Who should conduct the review?

When making a decision it is very important that decision makers should make a systematic review of the recommendations. It is really important that there should be a real separation between the decision maker and the team making the recommendation. A clear sign of biasness happens between the decision and action stages.

It is the job and responsibility of the executives to be systematic. He should know how and when to use the checklist . He should know how to manage the workforce and the situations sensibly. Organizations need to realize that a disciplined decision-making process, is the key to a sound strategy.

Cost and benefits

Effective decisions save the cost and time of organizations. Certain decisions if not made on time can result in heavy losses. It is important to eliminate the element of biasness from decision making as soon as possible this can prevent a loss of an opportunity or a loss of some cost. A recommendation having a biasness can also result a loss in cost . For healthy outcomes of the decision made, cost benefit analysis is mandatory .

 This case helped us in analyzing and researching

about the dangerous biases that can creep into every strategic choice. It also suggests the remedies to follow in order to avoid being a victim of these biases.
Executives need to realize that the judgment of

even highly experienced, competent managers can be fallible. A disciplined decision-making process, not individual genius, is the key to good strategy.