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June 2011 reprint r1106B

Before You Make That Big Decision...
dangerous biases can creep into every strategic choice. here’s how to find them—before they lead you astray. by Daniel Kahneman, Dan Lovallo, and Olivier Sibony

The Big idea

The Big Idea

2 Harvard Business Review June 2011

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Before Y ou Make That Big Decision…
Thanks To a slew of popular new books, many executives today realize how biases can distort reasoning in business. Confirmation bias, for instance, leads people to ignore evidence that contradicts their preconceived notions. Anchoring causes them to weigh one piece of information too heavily in making decisions; loss aversion makes them too cautious. In our experience, however, awareness of the effects of biases has done little to improve the quality of business decisions at either the individual or the organizational level. Though there may now be far more talk of biases among managers, talk alone will not eliminate them. But it is possible to take steps to counteract them. A recent McKinsey study of more than 1,000 major business investments showed that when organizations worked at reducing the effect of bias in their decision-making processes, they achieved returns up to seven percentage points higher. (For more on this study, see “The Case for Behavioral Strategy,” McKinsey Quarterly, March 2010.) Reducing bias makes a difference. In this article, we will describe June 2011 Harvard Business Review 3

Dangerous biases can creep into every strategic choice. Here’s how to find them— before they lead you astray. by Daniel Kahneman, Dan Lovallo, and Olivier Sibony

IllustRatIon: lasse skaRBovIk

The Big idea BeFoRe You Make tHat BIG DecIsIon…

The Behavioral eConomiCs of deCision making
Daniel kahneman (the lead author) and amos tversky introduced the idea of cognitive biases, and their impact on decision making, in 1974. their research and ideas were recognized when kahneman was awarded a nobel prize in economics in 2002. these biases, and behavioral psychology generally, have since captured the imagination of business experts. Below are some notable popular books on this topic: Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. thaler and cass R. sunstein (caravan, 2008) Think Twice: Harnessing the Power of Counterintuition by Michael J. Mauboussin (Harvard Business Review press, 2009) Think Again: Why Good Leaders Make Bad Decisions and How to Keep It from Happening to You by sydney Finkelstein, Jo Whitehead, and andrew campbell (Harvard Business Review press, 2009) Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan ariely (Harpercollins, 2008) Thinking, Fast and Slow by Daniel kahneman (Farrar, straus and Giroux, forthcoming in 2011) a straightforward way to detect bias and minimize its effects in the most common kind of decision that executives make: reviewing a recommendation from someone else and determining whether to accept it, reject it, or pass it on to the next level. For most executives, these reviews seem simple enough. First, they need to quickly grasp the relevant facts (getting them from people who know more about the details than they do). Second, they need to figure out if the people making the recommendation are intentionally clouding the facts in some way. And finally, they need to apply their own experience, knowledge, and reasoning to decide whether the recommendation is right. However, this process is fraught at every stage with the potential for distortions in judgment that result from cognitive biases. Executives can’t do much about their own biases, as we shall see. But given the proper tools, they can recognize and neutralize those of their teams. Over time, by using these tools, they will build decision processes that reduce the effect of biases in their organizations. And in doing so, they’ll help upgrade the quality...
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