Thursday, June 23, 2011

The Big Idea: Before You Make That Big Decision... - by Daniel Kahneman, Dan Lovallo, and Olivier Sibony

Found via Farnam Street.

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 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.