Cognitive Bias in Strategic Decision Making

CFO.com picked up on a fantastic McKinsey article about cognitive biases in strategic thinking. I have been writing about the importance of neuroscience and cognitive research on business for as long as this blog has been around. It still doesn't get the attention from the mainstream media it deserves, and it isn't even touched on in most business school programs. I think it is worthy of a class by itself.

Why is this so important? I will let the article explain it.

When judging the likelihood of potentially positive outcomes, human beings have an overwhelming tendency to be overoptimistic or overconfident: they think that the future will be great, especially for them. Almost all of us believe ourselves to be in the top 20 percent of the population when it comes to driving, pleasing a partner, or managing a business. In the making of strategic decisions, optimism not only generates unrealistic forecasts but also leads managers to underestimate future challenges more subtly – for instance, by ignoring the risk of a clash between corporate cultures after a merger.

The article points out that one way to become a better decision making company is to objectively analyze past decisions. Have you consistently made overly optimistic projections? Have you systematically misunderstood the levels of risk involved? If so, you can work on making your assessments more accurate. (I've only heard of a handful of companies ever doing this type of review. If any of you have a formalized process for reviewing past corporate decisions, please share it.)

The chart below if from the article, and highlights some common problems (a clearer version is here).
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My own suggestions for combating cognitive biases are to learn as much about them as possible, and foster a culture of open discussion. The first is difficult because people never seem to think they are subject to these biases (which is a bias in itself). The second is difficult because some people don't respond well to criticism or debate about their ideas, even when it is presented in a non-threatening way.

These ideas are important because many more aspects of business are becoming commoditized. Competitive advantages can be replicated, and thus made irrelevant, faster than ever before. Better decision making is an area that can still keep you at the head of the pack, but you have to use it and improve on it as you would any other corporate asset.