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Biases in Decision Making

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Why do smart executives, with lots of experience in their role and their industry, make the wrong decisions ? Is it only because they do not have the correct information and analysis? Or, perhaps, that other biases creep into their decision making process?

I have been studying the decision making patterns in companies for over 10 years now, and wanted to suggest some articles and readings that helped me understand what happens around the executive table - or in the boardroom.

McKinsey Quarterly just published a series of thoughtful articles on the subject: back in 2009, it published  "Flaws in Strategic Decision Making", the results of a global survey . Then this month, five articles: "How We Do It": Three Executives Reflect on Strategic Decision Making" , "Taking the Bias Out of Meetings" ,"Strategic Decisions, Can You Trust Your Gut ?" and "The Case for Behavioral Strategy". Of course, I also like to refer to "Hidden Flaws in Strategy" , an article published in 2003 which in my mind is still unmatched.

Our candid conversations with senior executives behind closed doors reveal a similar unease with the quality of decision making and confirm the significant body of research indicating that cognitive biases affect the most important strategic decisions made by the smartest managers in the best companies. - McKinsey Quarterly

Two books are also worth mentioning: "Why Smart Executives Fail" by Sydney Finkelstein  and "Les decisions absurdes" by Christian Morel (alas not translated into English) which analyzes some unbelievable absurd decisions made and examines why. In particular, I love the example of accidents between large tankers at sea, which modified their previously parallel course to end up colliding...

Finally, I stumbled upon the analysis done by the Swiss Aerial Transport authorities which have studied decision making patterns in the cockpit and have identified what made pilots make the wrong decision. In particular, they have studied how the data taken into account into the decision making is biased or influenced by the following:

1) Expectations based on past experiences (i.e. in a corporate context, expecting facts to mean the same now than they meant in the past)

2) Expectations based on anticipation (when one expects the market size to increase, any slight increase in the numbers would be interpreted as a confirmation of the "hunch" even if this is  a momentary blip - think about the current analysis of the economic recovery).

3) Expectations based on habits (we tend to make the same decisions we are used to - for example, to respond to price changes in the market).

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