Behavioral strategy — the analysis of thinking processes that incorporate non-logical, often unconscious processes that can adversely affect intended outcomes — is basic for most managers, but it is essential for learning leaders as well.
Traditional management disciplines are based on the idea that when we make decisions, we make the best choice according to rational considerations. These choices might be to take the most profitable route, the choice with the best payoff, the decision that has the most or the best data supporting it and so on. But the real world has demonstrated this is often not the case.
More Info, Worse Decisions
The idea behind behavioral strategy is that we all have deep cognitive biases (see sidebar) that affect any job or task we perform and dramatically reduce the effectiveness of our decisions.
Let’s take the outcome of mergers and acquisitions (M&A), for example. “Why Mergers Fail,” a piece published in November 2001 in McKinsey Quarterly, discusses research findings that indicate at best no more than one-third of mergers or acquisitions are clear successes. At least one-third are clear failures. In about one-third of cases, there is no benefit, although the transaction does not actually fail. Essentially, the outcome of M&A transactions is no better than chance, yet they are based on analysis by executives in the world’s best companies.
The failure of Lehman Brothers, for example, came because the cognitive biases of the organization’s senior managers led to overconfidence in their own abilities, and they saw the future in the same frame they had experienced in the past.
Lehman Brothers’ situation, or any scenario from a financial organization stricken by the recession, indicates that problems caused by a lack of understanding of cognitive bias are directly tied to the bottom line: failed mergers and acquisitions, large projects being over-budget and business strategies ignoring competitive responses or getting them badly wrong — all of which represent fundamental decisions that are supposed to create value.
For example, consider how more information can make decisions worse because of a framing bias. In this bias we tend to see things in a frame of reference we already believe in or are comfortable with. When we see a new mass of information, it will be interpreted by this frame, and data that supports this frame will be used. Add to this the overconfidence bias, in which a manager’s qualifications lead him to believe he has the skills to forecast accurately, and it is easy to see why so many key decisions can go so wrong.
Business education may make things worse. Research from McKinsey Quarterly’s 2011 “The Case for Behavioral Strategy” concludes that “good analysis in the hands of managers won’t naturally yield good decisions.” This flies in the face of conventional wisdom, which assumes if we are smart, educated and have the right data, we will make good decisions.
For instance, most chief learning officers would believe sending senior executives to an advanced management course run by a prestigious university would be a good learning strategy. However, the implications of behavioral strategy suggest such a course will only reinforce managers’ existing cognitive biases; their decision making will not improve as a result. It might even get worse due to a misplaced perception that the course has made them more prescient.
Disciplines and approaches taught in MBA courses are based on these principles: more data is better, more education is better and better logic leads to better business outcomes. Internal learning strategies at corporations are based on a similar, flawed approach.
CLOs need to do more to ensure managers are aware of their own cognitive biases and the steps they can take to address them. This awareness could take some unpalatable forms, as it may force senior managers to confront behavioral vulnerabilities that can lead to adverse business outcomes.
They must go beyond structured learning and offer different types of information, options and scenarios. They must confront managers with personal cognitive biases that can lead them either to failure or to sub-optimization in their business decisions because unless we take these cognitive biases into account, we will continue to lose business value or leave it unrealized. There will be more global economic crises, only a minority of complex business scenarios will succeed, and deliberated investment decisions may do worse than those picked out of a hat.
The Learning Leader’s Role
According to Michael Pilnick, chief human resources officer of Wolters Kluwer, “for every company, the key asset that impacts its financial performance is its human capital.”
Therefore, making the right incremental changes to a company’s culture can drive improvements to financial results that are material and sustainable. Those incremental changes are usually driven by learning and leadership development strategies.
Leadership development: Two cognitive biases particularly affect leaders. The first is the overconfidence bias, which often gets stronger as a leader gains seniority. The second is the framing bias, where the leader tends to consider new problems based on the framework for his leadership at that time.
We can’t assume a top business school’s high academic qualifications will make for more effective leadership development, or that higher business qualifications will lead to better leadership. Participants must undergo rigorous assessments to make them aware of their cognitive biases, and learning leaders must offer methods with which to address and compensate for them. This should occur not just through coursework but through simulations that make participants feel what is going on at an emotional level. Then it is easier to relate their cognitive biases directly to business outcomes.
Such learning will prompt a greater appreciation for the business framework within which the leader will operate, but by itself it will do nothing to provide an understanding of a leader’s personal cognitive biases and how to address and compensate for them. Learning leaders need to take definitive steps to address:
• Common cognitive biases.
• Their own personal cognitive biases.
• Cognitive biases in their industry.
• Systemic cognitive biases in their company.
• Systemic cognitive biases in their profession.
CLOs should ensure these are covered either in internal courses or external business school courses, preferably by someone who has occupied real business roles and has not just been a teacher.
Training: Again, the key thing to appreciate when considering an organization’s training strategies is that every person has cognitive biases. More importantly, every job function has characteristic cognitive biases.
For example, research and development people characteristically have a framing bias which leads them to reject research paradigms that are not the same as the one on which they are currently basing their research. For the past 20 years or so, most Alzheimer’s research has been based on the plaque paradigm, which has not achieved any results, while other promising approaches have been rejected.
Many customer service representatives (CSRs) have a framing bias — they are taught to see things within the same paradigm on which the company has based its products. CSRs also should listen to and provisionally accept alternative framing biases to make their responses more effective and empathetic.
Sales is another area where there are characteristic cognitive biases. One is called anchoring, the tendency to rely too heavily on one piece of information when selling, such as the presumed benefit, which tends to crowd out what the customer might see as the main benefit. Another is the bandwagon effect, the tendency to imitate others who seemingly are having success with a certain sales tactic without realizing it might be due to a different cause.
Training needs to incorporate teaching about these cognitive biases so the different job functions can understand how they both help and hurt performance. It is not enough to teach a traditional sales, customer service or product development course without reference to these behavioral issues.
Learning: The cognitive biases can be reduced to three issues: learning agility, self-awareness and humility. Sometimes these might be in short supply, and corporate hubris can dull sensitivity to the need to ensure managers at all levels are aware of them.
Learning agility is increasingly more important in leadership than knowledge or expertise. Learning strategies must teach agility and show its importance to flexible and effective leadership.
Second, we understand from behavioral strategy that it is not intelligence per se that determines whether leadership will be effective but the extent of the leader’s self-awareness and ability to understand his or her own vulnerabilities and how to resist defensiveness when compensating for them.
Third, learning leaders must instill humility as one of their functions. We must be humble if we want to be right because so often our own cognitive makeups will lead us unknowingly down the wrong paths.
This is another way of saying that learning approaches also must include teaching about character. That may seem like a separate topic, but the lesson of behavioral strategy is that character, humility, openness and self-awareness, not technical qualifications and information, are the true sources of management success.
E. Ted Prince is the founder and CEO of the Perth Leadership Institute. He can be reached at editor@CLOmedia.com.