You are on page 1of 6

A P R I L 2 015

Are you ready to decide?


Philip Meissner, Olivier Sibony, and Torsten Wulf

Before doing so, executives should ask themselves two sets of questions.

Good managerseven great onescan leads them to take risks they should not
make spectacularly bad choices. Some take, in the mistaken belief that they will be
of them result from bad luck or poor able to control outcomes.
timing, but a large body of research
suggests that many are caused by The combination of misreading the
cognitive and behavioral biases. While environment and overestimating skill and
techniques to debias decision making control can lead to dire consequences.
do exist, its often difficult for executives, Consider, for instance, a decision made
whose own biases may be part of the by Blockbuster, the video-rental giant, in
problem, to know when they are worth the spring of 2000. A promising start-up
applying. In this article, we propose a approached Blockbusters management
simple, checklist-based approach that with an offer to sell itself for $50 million and
can help flag times when the decision- join forces to create a click-and-mortar
making process may have gone awry video-rental model. Its name? Netflix.
and interventions are necessary. Our As a former Netflix executive recalled,
early research, which we explain later, Blockbuster just about laughed [us] out of
suggests that is the case roughly 75 their office.1 Netflix is now worth over
percent of the time. $25 billion. Blockbuster filed for bankruptcy
in 2010 and has since been liquidated.

Biases in action In retrospect, it is easy to ascribe


this decision to a lack of vision by
In our experience, two particular types Blockbusters leadership. But at the
of bias weigh heavily on the decisions of time, things must have looked very
large corporationsconfirmation bias different. Netflix was not, then, the
and overconfidence bias. The former video-on-demand business it has since
describes our unconscious tendency become: there were nearly no high-speed
to attach more weight than we should broadband connections of the kind we
to information that is consistent with now take for granted, and widespread use
our beliefs, hypotheses, and recent of video streaming would have seemed
experiences and to discount information like a futuristic idea. In Blockbusters eyes,
that contradicts them. Overconfidence Netflix, with its trademark red envelope,
bias frequently makes executives was merely one of several players
misjudge their own abilities, as well as occupying a small (and thus far unprofitable)
the competencies of the business. It mail-order niche in the video business.
2

Furthermore, this was the very time why).3 Another technique is to organize
when the dot-com bubble had burst: a formal scenario-planning exercise
as the Nasdaq Composite Index expanding the range of assumptions
quickly collapsed from its March 2000 underpinning a planor even a war
high, many managers of traditional game, in which executives put them-
companies felt vindicated in their belief selves in their competitors shoes. One
that investors had grossly overestimated study of investment decisions4 showed
the potential of Internet-based models. that when a company uses a range
Through the lens of the confirmation of debiasing techniques, its return on
bias, Blockbusters executives likely investment rises considerably. For high-
concluded that the approach Netflix impact, repetitive decisions, such as
had made to them was evidence of its large investments, it is sensible to embed
desperation. And it did not take a lot of debiasing techniques in a companys
overconfidence for them to assume that formal decision-making processes.5
they could replicate Netflixs mail-order
model themselves, should they ever But this doesnt solve things for the
decide to do so. myriad daily decisions that are the bread
and butter of executives. A war game
The overconfidence and confirmation or a scenario-planning exercise entails
biases werent the only ones at work at a significant investment of time; how
Blockbuster, of course, just as in most are senior leaders to know when that
organizations.2 But they are important is worthwhile? Furthermore, the very
enough to warrant special attention. nature of biases means that the person
driving the decision process generally
cannot judge whether further debiasing
An intractable problem? is needed. Indeed, that executive may be
experiencing the confirmation bias and
Fortunately, debiasing techniques can overconfidence at the crucial time. When
help organizations overcome such managers make an ordinary mistake,
biases. These techniques aim to limit the such as a calculation error, they can learn
effects of overconfidence by forcing the from their experience and avoid repeating
decision maker to consider downside it. But when biases lead them astray, they
risks that may have been overlooked or are not aware of whats happening, so
underestimated. And they can mitigate experience does not help them become
the dangers of confirmation bias by better at debiasing themselves, and they
encouraging executives to consider cannot just watch out to keep their
different points of view. biases in check.

Examples of such techniques include


either the systematic use of a devils Two tests of decision readiness
advocate or a premortem (individuals
project themselves into a future where Since executives wont get very far by
the decision has failed and imagine, in focusing directly on biases, they should
prospective hindsight, what failed and consider instead whether safeguards
3

against them have been used. In other that led to such a decision appears to
words, leaders should ask about the have included safeguards against both
process used to develop the proposal, confirmation bias and overconfidence.
not about the proposal itself or the
degree of confidence it inspires. Exhibit 1  each out. Proposals that fall in
R
suggests questions for evaluating the this quadrant have been tested for
process in the context of the two main their resilience to downside risks but
categories of biases described earlier: may still be based on overly narrow
assumptions. Decision makers should
 he first set of questions
T consider techniques that broaden their
(Consideration of different points perspectives and help them generate
of view) aims to determine whether meaningful alternatives. One such
the confirmation bias has been kept technique is the vanishing-options test:
in check. These questions focus on executives force themselves to generate
the sources of assumptions and the new ideas by imagining that none of
diversity of opinions expressed. A the proposals on the table are available.7
broad set of sources (including outside
views) or a diverse set of opinions Stress-test. Decisions in this quadrant
is a good indicator that the initial reflect a variety of viewpoints but,
assumptions of the decision process nevertheless, may not have been
have not gone unchallenged.6 sufficiently challenged and could
therefore be tainted by overoptimism.
 second set of questions
A Executives should consider a thorough
(Consideration of downside risk) asks outside review of the possible risks
whether the possibility of negative for instance, by conducting a premortem
outcomesincluding company-, or asking an outside challenger to play
industry-, and macro-level downsides the role of devils advocate.
has been thoroughly evaluated. Such
an evaluation can act as a safeguard Reconsider. When a decision appears
against overconfidence. in the bottom-left quadrant, the
process has probably not been
On each dimension, the questions are comprehensive. Decision makers
designed to be flexible, so that the should therefore follow a dual strategy
circumstances of the decision at hand that generates both new perspectives
can be taken into account. Once the and new reviews of risks.
questions have been answered (with a
simple yes or no), the responses can be By using this decision-screening tool, a
transcribed on a matrix (Exhibit 2). This company can learn if it needs to expand
scoring will place the proposed decision its focus and options in the strategy
in one of four quadrants, leading to process. We recently applied a version
different courses of action: of the tool together with 26 senior
executives of European corporations
Decide. This quadrant represents the from a variety of industries, ranging from
most favorable outcome: the process construction to manufacturing, services,
4

Exhibit 1

Decision-making checklist
Consideration of different points of view YES or NO

Have the recommenders checked their assumptions?


In their analysis, have they considered factors that would make the project
exceed its initial goal?
Have they compared their assumptions with those made for a comparable
external project?
Have they compared their assumptions with those made for a comparable
internal project?

Have the recommenders integrated a diverse set of opinions?


Have they assembled a diverse team for the decision-making process?
Have they discussed their proposal with someone who would most certainly
disagree with it?
Have they considered at least one plausible alternative to the course of
action being recommended?

Total yes answers

Consideration of downside risk YES or NO

Inside the organization, what are this decisions two most important side
effects that might negatively affect its outcome? Have the recommenders
considered these side effects?
Side effect A
Side effect B

In the companys industry, what are the two most important potential
changes that might negatively affect the outcome of this decision? Have
the recommenders considered these changes?
Potential industry change A
Potential industry change B

In the macro environment, what are the two most important potential
changes that might negatively affect the outcome of this decision?
Have the recommenders considered these changes?
Potential macro-environment change A
Potential macro-environment change B

Total yes answers

Source: Philip Meissner, Olivier Sibony, and Torsten Wulf


5

Exhibit 2

Screening matrix Use the totals from the


decision-making checklist

3+
Reach out Decide
YES

Consideration of
downside risk
(vs risk of

02 Reconsider Stress-test
YES

02 YES 3+ YES

Consideration of different points of view

Source: Philip Meissner, Olivier Sibony, and Torsten Wulf

and retail. We asked these executives How to use the decision-


to analyze a strategic-decision proposal screening tool
that a project team within their own
organization (but not the participants) A key question is who answers the
had recently made. questions in the tool. Since individuals
developing a recommendation will not
Only just over a quarter of the proposals, be aware of their biases, they cannot be
it emerged, were truly decision ready. expected to assess their own decision
The bar for readiness on each dimension readiness. The answers must therefore
(three positive answers out of six come from the outside: not the executive
questions) was relatively low. Yet a who has driven the decision process, but
striking 73 percent of the respondents others who have a more neutral view.
judged that the decisions they were
reviewing did not pass these tests. They In practice, decision makers will be in
then used the prescriptions of the matrix one of two situations. In the first, and
to revisit the decisions. easiest, they reviewed recommendations
6

prepared by others but had minimal the risk takers are blind to their own
involvement in developing them. In that overconfidence or have failed to consider
case, decision makers are well placed alternative viewpoints.
to address the screening tool questions
themselves. The disciplined use of decision aids such
as this screening tool offers a way to
But in the second and more frequent spot bad decisions before they happen,
case, the decision makers were actively without significantly slowing down the
involved in studying decisions that have decision process. Executives who adopt
now reached the final stage. In this case, this approach will free up resources for
they no longer have an outside view of value-creating projectsand improve their
the process and will need to seek out chances of keeping the names of their
answers from informed observers: staff companies off the roll call of organizations
members, such as the CFO; colleagues that made notorious blunders.
from other parts of the organization; or 1 See Marc Graser, Epic fail: How Blockbuster could
outside advisers. Some companies will have owned Netflix, Variety, November 12, 2013,
wish to define this role in advance and variety.com.
make it a formal part of their decision- 2 See Dan Lovallo and Olivier Sibony, The case

making process, to avoid having a for behavioral strategy, McKinsey Quarterly,


March 2010, mckinsey.com.
respondent who shares the decision 3 See Daniel Kahneman and Gary Klein, Strategic
makers point of view. decisions: When can you trust your gut?,
McKinsey Quarterly, March 2010, mckinsey.com.
4 See Massimo Garbuio, Dan Lovallo, and Olivier
Sibony, Evidence doesnt argue for itself: The
value of disinterested dialogue in strategic decision
In an environment of change and making, forthcoming in Long Range Planning.
disruption, many leaders fearrightly 5 See Michael Birshan, Ishaan Nangia, and Felix
that their companies do not take Wenger, Preparing to make big-ticket investment
decisions, July 2014, mckinsey.com.
enough risks or will fall prey to analysis
6 See Daniel Kahneman, Daniel Kahneman:
paralysis and let opportunities slip away.
Beware the inside view, McKinsey Quarterly,
Hence the popularity of start-ups as role November 2011, mckinsey.com.
models of fast, iterative decision making. 7 See Chip Heath and Dan Heath, Decisive: How to
As Reid Hoffmanns often retweeted Make Better Choices in Life and Work, New York:
Crown Business, 2013.
quote goes, If you are not embarrassed
by the first version of your product, The authors would like to thank Tim Koller for
youve launched too late. his contributions to this article.

While this better sorry than safe mind- Philip Meissner is an assistant professor
set characterizes many successful of strategic and international management at
the Philipp University of Marburg, Germany,
start-ups, it may not be the best
where Torsten Wulf is a professor and chair
inspiration for the strategic decisions
of strategic and international management.
of mature companies. Some risks are
Olivier Sibony is an alumnus of McKinseys
worth taking: those taken knowingly, in
Paris office.
pursuit of commensurate rewards. But
Copyright 2015 McKinsey & Company.
some risks are taken recklessly because All rights reserved.