Lean Decision Quality: for Future-Proof Organization

1. Why making quality decisions matters

Decision-making is at the heart of organizational success. We are all Decision Maker, both at work and in private life. We make around 35,000 decisions in one day, from the simplest to the most difficult; for the simple one, we use the empirical rule based on experience, but for the difficult ones, we can use decision-making processes that involve more people supported by tools that facilitate decisions, especially today when we are living and working in a hyper-connected global world, where the management of the VUCA environment (Volatility, Uncertainty, Complexity, Ambiguity) in Organizations is becoming increasingly strategic.

The great forces of the modern age, globalization and digitization, are removing the traditional market entry barriers. Companies can no longer rely on great manufacturing capacity, a superior supply chain, and established distribution networks to defend their market position from challengers. The rise of new emerging economies, combined with technological developments like blockchain, the Internet of Things, platform economies, A.I. are combining to flatten and commodify traditional back-end defences.

In this new landscape making quality decisions can be a crucial differentiator.

According to Bain & Company, in the HBR article The decision-driven organization by Marcia W. Blenko, Michael C. Mankins, and Paul Rogers, decision-making drives 95% of the business performance.

According to Cloverpop research (1) on 566 real business decisions taken by 184 teams in a wide range of American companies (medium-big sized) between 2015 and 2017, highlighted that decisions improve when Diversity increases. Fostering Gender Diversity decisions get better between 58% and 73% than in an all-male group, and they reach 87% if age and geographical diversities are fostered as well (with at least 2 Continents).

The multi-functional, multi-cultural and gender DIVERSITY in organizations develops critical thinking, creativity and problem-solving. However, fostering Diversity is needed but not sufficient to make quality decisions. Unconscious biases, which are inherent to human nature, downgrade the quality of decisions.

(1) https://www.cloverpop.com/hacking-diversity-with-inclusive-decision-making-white-pape

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2. Biases degrade the quality of a decision

What is a Cognitive Bias?

It is a judgment or prejudice on the reality surrounding us, not tied to objective and real elements, but only to personal perceptions, which filter reality, interpreting the information in our possession even if not logically or semantically connected to transform into beliefs. Thus they are constructs founded, outside of critical judgment, on wrong or deformed perceptions, on prejudices and ideologies.

We perceive our reality through 3 different filters

Neurological (common to all humans). The five senses: sight, hearing, touch, smell and taste

Socials that distinguish us as an ethnic-linguistic group. Cultural presuppositions, rituals, the socio-economic context, etc.

Individual filters distinguish us as individuals — our personal experience, interests, habits, beliefs, values, etc.

Biases are non-conscious drivers — cognitive quirks — that influence how people see the world. They appear to be universal in most of humanity, perhaps hardwired into the brain as part of our genetic or cultural heritage, and they exert their influence outside conscious awareness. Everything you do, either going shopping, talking or making decisions, you find biases at work.

And bear in mind that when you talk about biases, you don’t have to limit your ideas to the negative meaning we commonly attribute to the word.

On the whole, biases are useful and adaptive. They enable you to make quick and efficient judgments and decisions with minimal cognitive effort. They are at the base of what we commonly identify as intuition, which is an experience processed by the brain.

When we have to decide which can't base on Intuition but which needs information to be collected and analyzed, biases risk limiting the research/collection of such information and inhibiting us from evaluating valuable alternatives.

In these cases, most people feel quite confident about their decisions, but we often leave more than half of the value (in terms of opportunity) when making any decision. When the decision is unique (no alternatives have been explored) and when results are not certain (that is our decisions have an impact on the future).

Researchers say most people evaluate their decisions, giving them an 8 out of 10. And, based on our experience, we can confirm these values: at a closer inspection, Decision Makers admit that various aspects of their decisions were overlooked or underdeveloped and this lead to sub-par decisions.

Over-confidence often leads to losing more than half of the value (understood as opportunity) in the decision-making process. And this is particularly true when the decision is unique, or alternatives have not been explored, and when the results are uncertain, as the decision is oriented towards the future.

The process that leads to quality decisions cannot ignore the awareness of our human nature, that infallible or we make mistakes. And these errors are much greater the more complexity increases.

Indeed, it has been widely proved in the past 30-40 years and by various psychologists – Amos Tversky and Daniel Kahneman among others – that when a person has to decide in an uncertain situation, they will mostly use an intuitive thought resorting to heuristics, that is to mental shortcuts deriving from our evolution, which lead to biases and to wrong decisions, rather than taking advantage of refined rational processes.

Going further into the human brain, Daniel Kahneman, a psychologist and Nobel prize for economics, in his famous book Thinking Fast & Slow, explains very well the mental processes that guide our decisions.

Daniel Kahneman states that we have two significantly different mental processes.

System 1_(FAST BRAIN): it processes emotions and makes decisions; it is swift, intuitive, emotional, makes decisions according to experience, works on the assumption that all that is accessible is all that matters (WYSIATI or Comfort Zone). It can’t be trained to reason correctly to make deliberate decisions, and without support, it can lead us into biases & traps.

SYSTEM 2_(SLOW BAIN): it processes logic; it is slow, analytical, rational, reflective and conscious. It can be trained to perform basic decision-making tasks by installing the so-called mindware, namely the knowledge and procedures that our brain uses to solve problems or make decisions. However, the SLOW Brain is susceptible to bias, especially in complex decision-making situations, which present uncertainty or interaction between many factors.

Chart 2.1 D.Kahneman Mental Processes

We miss many opportunities because we are Humans.

We can't make quality decisions by intuition only. The decision is often based on irrelevant, non-reliable or inadequate information.

We rely on advocacy culture(2) and presume that we reached a quality deal, excluding a priori the other alternatives. We don't really know what we lost.

We don't look for the greatest realizable value because we are used to the good enough syndrome and stop at the first, or the second option we are provided

We address the problem in a wrong way and end up facing the wrong problem

Biases and false hypothesis subvert rational and analytical thinking

Chart2.2 The loss of opportunities

(2) Most organizations use an advocacy/approval decision process: a decision problem is assigned to an individual or team who is then responsible to find the best solution and advocate for its acceptance by an approval body of decision Maker, who will either accept or reject the recommendation. This process leads to two problems. First is the advocacy myth, in which effective advocacy is misinterpreted as evidence of the quality of the recommended decision. Because rejection by Decision Maker is perceived as a loss, advocates will do their best to defend their proposal. An advocate’s goal is to sell the approval body on the benefits of the recommendation. Given this incentive, it is not surprising that advocates are highly biased in selecting the data, alternatives, and evaluation results that bolster their case. Advocates are not likely to offer significantly different, creative, and compelling alternatives to their recommendation—that would be like giving extra ammunition to one’s interrogator. Nor are they likely to offer fair characterizations of the uncertainty in their proposed solution. After all, their job is to convince the approval body with effective advocacy. The corollary to the advocacy myth is the approval myth, the idea that any proposed solution that is approved after intense interrogation by the approval body must be of high quality from Spetzler, C., Winter, H., Meyer, J. - Decision Quality: Value Creation from Better Business Decisions page152-153

3.The main biases that impact decision-making process and how to mitigate them

There are 3 types of Biases:

cognitive_ take shape unconsciously in our mind and derive from the information available (our brain cannot process every piece of information but filters)and are due to the information we have available; the brain, in fact, fails to process all the information but filters it

motivational_ take shape consciously in our mind and come from the divide between what we truly believe in our mind and what we say

social_ take shape consciously in our mind and are sometimes interpreted as company policy, but in reality, they are entrenched human tendencies. Even when nothing is at stake, we tend to conform to the dominant opinions of the group to which we belong (and/or its leader)

For the purposes of our analysis, we believe it is useful to investigate The main cognitive biases with a significant impact on the decisions organizations/Decision Makers make every day and debiasing techniques to reduce, even greatly, these biases (3)

Overconfidence

The excess of confidence that people have in their abilities and/or in that of the company. It leads people to ignoring contradictory information, making them more confident. For example, we are sure we have a winning strategy this year even if we are still doing the same things.

Debias technique

Limit the effects of overconfidence by forcing Decision Makers to consider downside risks previously dismissed or underestimated.

Examples of such techniques include systematic use of a devil's advocate or a premortem state simulation – the person imagine a future where their decision failed and imagine what went wrong and why.

Confirmation Bias

Our innate tendency to value more a piece of information when it is coherent with our belief system, our hypothesis and recent experiences, and reject those that are contradictory.

For example, when we bring together a group of people sharing experiences and goals, usually these people tell stories that are generally favourable. A study by McKinsey showed that 80% of managers think their product stand out, but only 8% of clients agree.

Debias technique

Confirmation biases' dangers can be diminished by encouraging Decision Makers to consider different points of view.

For example: organizing a formal scenario planning exercise, expanding the range of hypothesis in a plan, or even a war game, where Decision Makers pretend to be their competitors. A study by McKinsey on decisions linked to investments showed that when a company uses a range of debiasing techniques, the investment return increases greatly.

Stability Bias (risk aversion, anchoring, sunk cost, status quo)

Risk Aversion

Most of the typical risk aversion linked to small investments can be attributed to the combination of two well-documented behavioural biases. The first is Loss Aversion, when people fear loss more than they value corresponding gains. The second is Narrow Framing when people evaluate possible risks as if there were only one possible result – like tossing a coin once – instead of seeing them as part of a bigger result portfolio – like tossing 50 coins (Daniel Kahneman won a Nobel Prize in Economy in 2002 thanks to this research)

Debias technique

Organizations suffering risk aversion often dismiss interesting projects before being officially offered. To encourage managers and senior executives to explore innovative ideas beyond their comfort zone, they could ask their staff regularly:

project ideas which are risky but have great potential in terms of income

investment advice accompanied by a riskier version of the same project with either an increase or an alternative

projects with a series of scenarios or results, including both failing and greater success. This will enable those in charge of evaluating the project better to understand the potential value and the risk factors

Anchoring

The decisive impact the first idea or the first figures has on the following strategic debate. (For example, last year figures are an implicit anchor but a powerful one when revising our budget).

Debias technique

To de-anchor people, we evaluate both best and worst-case scenarios.

Sunk-cost fallacy

These are all the past investments which are no longer recoverable. Insisting on a business instead of giving it up.

Debias technique

According to McKinsey, it seems promising to reduce or reset the budget drastically. Companies use this approach only when they are facing serious problems.

Status Quo

Preferring our comfort zone when there are no external stimuli.

Debias technique

To help people/organizations shaking up their situation, we can establish unreachable goals which have to be reached through business as usual(4). An alternative can be starting by reducing each business unit or division's budget by a fixed percentage (10-15%, for example). The hard decisions deriving from this make it easier to redistribute resources among more valuable opportunities. Last, more demanding budget allocations on a more granular level can help companies redefine their investments.

Finally, even if it is not among the cognitive biases, I consider it useful to point out also the social bias named Groupthink: when we are used to thinking and making decisions as a group, this deters creativity or individual responsibility. Many organizations make this even worse because of the strong company culture and incentives to comply. The lack of disagreement is a big red flag.

Debias technique

Listen to different opinions. A real debate requires Decision Makers from different backgrounds and personalities, a trustful environment, and a culture that disembodies discussions.

To summarize

We must not let biases influence decisions; that’s why we need to design practices and processes in advance because by reducing the unhelpful biases that are at the heart of many organizational challenges today, we not only reduce the risk of catastrophic loss — we redefine what it means for our organization to win.

Individual cognitive effort is not enough. We have to cultivate an organization-wide culture, in which people continually remind one another that the brain’s default setting is egocentric, that they will sometimes get stuck in a belief that their experience and perception of reality is the only objective truth, and that better decisions will come from stepping