Board Blind Spots: 12 Cognitive Biases that can Hamper Corporate Performance

Parts I & II

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The other day, a friend asked me why the world seems to be heading back into another COVID spiral. He believed that we would have everything under control by now.

His question reminded me of how easily we can fool ourselves because of cognitive biases that shape our perception of reality.

For example, after nine months of social distancing, working from home, and wearing masks, most people are sick of guarding against infection. During the summer and early fall, as infection rates went down, people assumed we had COVID under control and that this winter would be better than last. While logical on several levels, this assumption involved a great deal of projection and hopeful thinking. We seized on optimism and took a trend and extended that into the future.

Businesses make decisions based on assumptive fallacies all the time. In the whirl of everyday events, we may not know how much and how many cognitive biases play a role. As the ultimate over-seer and provider of wise counsel, one thing a Board can do is to test assumptions for faulty thinking. In this series, I wanted to lay out some potential areas where such risk can come into play.

1. Gambler’s Fallacy

This is the assumption that the odds of something happening accumulate because of past trends. So, if we flip a coin five times and come up with “tails” each time, it’s easy to believe the odds are better for the next flip to be “heads.” In fact, the odds remain precisely the same.

Companies often make bets, believing the odds are better or worse than they are actually the case. For example, a retailer might see a surge in orders as a trend or sign that consumption patterns will soon regress to the mean and order from suppliers accordingly.

Remedies:

a. Assessing reality requires going deeper into underlying causes. Analyze the causes and plot your graphs against the power (budget, energy, externalities, people) to influence the future.

b. Consider one or maybe two downsides and plan against the worst-case scenario.

c. Construct conditional planning “if X then Y” and request 2–3 versions of the expected reality.

d. Always keep an ace in your sleeve. Don’t include it in the main scenario; it would be a bonus or a potential relief.

2. Pessimism/Optimism Bias

It’s natural to feel good or bad about a possible outcome, depending on factors that don’t actually influence the likelihood of something happening. If morale is high or low, people might be expecting the outcome to go one way or the other. Or, the CEO might try to influence confidence or energy to achieve an important goal.

However, it’s easy to overlook potential problems if too optimistic or to miss opportunities or creative solutions when pessimistic. It helps to have a mix of vantage points, which the Board can provide.

Remedies:

a. The Six Thinking Hats (De Bono) theory can help. View the situation through different lenses. Pass any idea from the point of view of the “black hatter” and so on.

b. Diversity in Boards composition is vital. It helps reducing bias against one or the other direction.

c. Honing listening skills. Authentic listening and accepting the opposite opinion’s value are crucial competencies and can be cultivated and incorporated into group norms.

 

3. The Clustering Illusion

As a pattern spotter, I’m often guilty of this one myself. It’s easy to look at various data points and see a trend when they support one another. Data points must be observed with two independent views. On the one hand, they need to be taken in as isolated events; they are assessed for their correlations or reinforcing indications from another.

For example, it might be elementary to view an increase in refugees, a surge in disease, and a calamitous weather event as signs that global instability is rising, and a company should stay out of a given market. Or these could be isolated events that have nothing to do with one another. Tough times can present “buying” opportunities when other companies are scared.

Remedies:

a. Interpreting data is both art and science. Use experts or testimonies from people who really “lived” the situations behind each data point.

b. Consider different best-fit correlations to explain the data. Brainstorm and debate, especially for essential decision-making exercises, i.e., budget allocations.

c. Test the main hypotheses in the real world.

Cognitive biases can affect small and large decisions. The Board should focus on the big ones. By systematically and analytically considering potential cognitive biases, the Board can model and reinforce the kind of thinking that steers a company through uncertain waters.

Diversity, listening, hypothesis testing, and scenario planning are solutions to avoid the fallacies discussed.

A strong culture and a sense of purpose are critical markers of high-performance organizations.

Think of Apple after the Steve Jobs return or Amazon under Bezos or Unilever under Polman. Such organizations are highly cohesive and driven by their vision or mission. To outsiders, they seem to have their own language and a particular swagger. Inside, people adapt to a very shared way of approaching problems, finding solutions, and seeing the world.

The benefits are enormous. Internal identity. External brand. A sense of clarity and speed around decision-making. Connection to customers. Boldness in the market.

But there’s also a risk when companies become too insular and focused on internal priorities and perspectives. Facebook began to blur its socially responsible purpose (to bring the world closer together) with what was suitable for Facebook (selling ads and propagating viral lies.) Uber believed in itself as a disruptive force but ran roughshod over drivers and communities’ needs in the process. In its bid to bring more environmentally sustainable cars to the world, Volkswagen lied about its own measures and paid a massive price. Once noted for its dominance in every market it entered, GE lost control of its own riskiest businesses.

How can a Board help a company avoid the slippery pitfalls of insular thinking, hubris, and narrow perspectives? There are several cognitive biases to be aware of. 

4. The Bandwagon Effect / Group Think

It’s incredibly easy to develop group think and follow the herd in tight cultures, especially when that herd is thriving and smart. Boards need to encourage systems that reward, select, and promote people who fit the culture but broaden perspectives, interests, and approaches.

They also need to be on the look-out for ideas that gain momentum because they fit expectations or goals. Hard questions and analysis are required to test assumptions. Conformity is death.

Remedies:

a. Do frequently — at least once a year — STOP & THINK. It can be a highly regenerative and creative process if well prepared. In such an approach, you challenge your assumptions and build future scenarios.

b. Invite outliers, non-conformists, even kids into a Board Meeting. They are practically not framed by any corporate culture or group norms. Let them observe and talk.

c. Play a competition “war game.” Split your Board into two groups; your company and your primary competitor. Compete against a target under a specified scenario. Being in the shoes of your competitor -even temporarily — forces you to think differently and alleviate corporate myopia.

5. Ingroup Favoritism

It’s easy for executives, managers, and influential peers to treat people like them as unique. It’s easy to put the golden halo on those we agree with, but this creates clusters of like-minded people and gives them preferred status. As a result, those who disagree or think differently get quiet or go elsewhere. Worse, they squelch their own ideas and instincts to try and win their way into the circle.

Boards can encourage executive leadership to build teams and departments that break rather than create clusters and in-groups.

Remedies:

a. Reverse mentoring is a way to expose senior people to ideas and ways of working; they might otherwise under-value or dismiss.

b. Cross-functional moves and periodically changing hats can be another approach. The incomer always has good chances of breaking the “boys club” culture.

6. False Consensus

The hardest thing for a CEO or senior leader is getting the information they don’t want to hear or know. The easiest thing is to push, overtly or inadvertently, a point of view onto others and feel validated when that thinking gets reflected.

Just because people tell the leader that they are right does not mean that confirmation is accurate, positive, or helpful. Think of the famous tale of Hans Christian Andersen’s “The Emperor’s New Clothes.” Sometimes, they pretend they agree, but in essence, they follow their own agenda.

Remedies:

a. Expand the classic notion of diversity (color, gender, beliefs, etc.) into “brain diversity.”

b. Boards should encourage leaders to have key critical thinkers on their teams or run ideas or plans by — people they can trust to argue a different point of view or call the leader on their BS.

c. Reward the opposite opinion, timely and adequately expressed.

 

CTdec20

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