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    HBR's 10 Must Reads on Making Smart Decisions (with featured article "Before You Make That Big Decision..." by Daniel Kahneman, Dan Lovallo, and Olivier Sibony)
    HBR's 10 Must Reads on Making Smart Decisions (with featured article "Before You Make That Big Decision..." by Daniel Kahneman, Dan Lovallo, and Olivier Sibony)
    HBR's 10 Must Reads on Making Smart Decisions (with featured article "Before You Make That Big Decision..." by Daniel Kahneman, Dan Lovallo, and Olivier Sibony)
    Ebook242 pages3 hours

    HBR's 10 Must Reads on Making Smart Decisions (with featured article "Before You Make That Big Decision..." by Daniel Kahneman, Dan Lovallo, and Olivier Sibony)

    By Harvard Business Review, Daniel Kahneman and Ram Charan

    4.5/5

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    About this ebook

    Learn why bad decisions happen to good managers—and how to make better ones.

    If you read nothing else on decision making, read these 10 articles. We’ve combed through hundreds of articles in the Harvard Business Review archive and selected the most important ones to help you and your organization make better choices and avoid common traps.

    Leading experts such as Ram Charan, Michael Mankins, and Thomas Davenport provide the insights and advice you need to:

    • Make bold decisions that challenge the status quo
    • Support your decisions with diverse data
    • Evaluate risks and benefits with equal rigor
    • Check for faulty cause-and-effect reasoning
    • Test your decisions with experiments
    • Foster and address constructive criticism
    • Defeat indecisiveness with clear accountability
    LanguageEnglish
    PublisherHarvard Business Review Press
    Release dateMar 5, 2013
    ISBN9781422191439
    HBR's 10 Must Reads on Making Smart Decisions (with featured article "Before You Make That Big Decision..." by Daniel Kahneman, Dan Lovallo, and Olivier Sibony)
    Author

    Harvard Business Review

    Harvard Business Review es sin lugar a dudas la referencia más influyente en el sector editorial en temas de gestión y desarrollo de personas y de organizaciones. En sus publicaciones participan investigadores de reconocimiento y prestigio internacional, lo que hace que su catálogo incluya una gran cantidad de obras que se han convertido en best-sellers traducidos a múltiples idiomas.

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      It would be a smart decision to read this book. You might make an even smarter decision if you applied just one of the ideas here to your important decisions.

    Book preview

    HBR's 10 Must Reads on Making Smart Decisions (with featured article "Before You Make That Big Decision..." by Daniel Kahneman, Dan Lovallo, and Olivier Sibony) - Harvard Business Review

    HBR’s 10 Must Reads series is the definitive collection of ideas and best practices for aspiring and experienced leaders alike. These books offer essential reading selected from the pages of Harvard Business Review on topics critical to the success of every manager.

    Titles include:

    HBR’s 10 Must Reads on Change Management

    HBR’s 10 Must Reads on Collaboration

    HBR’s 10 Must Reads on Communication

    HBR’s 10 Must Reads on Innovation

    HBR’s 10 Must Reads on Leadership

    HBR’s 10 Must Reads on Making Smart Decisions

    HBR’s 10 Must Reads on Managing People

    HBR’s 10 Must Reads on Managing Yourself

    HBR’s 10 Must Reads on Strategic Marketing

    HBR’s 10 Must Reads on Strategy

    HBR’s 10 Must Reads on Teams

    HBR’s 10 Must Reads: The Essentials

    On

    Making Smart Decisions

    HARVARD BUSINESS REVIEW PRESS

    Boston, Massachusetts

    Copyright 2013 Harvard Business School Publishing Corporation

    All rights reserved

    No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to permissions@hbsp.harvard.edu, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.

    The web addresses referenced in this book were live and correct at the time of book’s publication but may be subject to change.

    Library of Congress Cataloging-in-Publication Data

    HBR’s 10 must reads on making smart decisions.

    pages cm.—(HBR’s 10 must reads series)

    ISBN 978-1-4221-8989-4 (alk. paper)

    1. Decision making.   I. Harvard business review.   II. Title: HBR’s ten must reads on making smart decisions.

    HD30.23.H39 2013

    658.4'03—dc23

    2012045971

    Find more digital content or join the discussion on www.hbr.org.

    eISBN: 978-1-4221-9143-9

    Contents

    The Hidden Traps in Decision Making

    by John S. Hammond, Ralph L. Keeney, and Howard Raiffa

    Before You Make That Big Decision

    by Daniel Kahneman, Dan Lovallo, and Olivier Sibony

    How to Avoid Catastrophe

    by Catherine H. Tinsley, Robin L. Dillon, and Peter M. Madsen

    Conquering a Culture of Indecision

    by Ram Charan

    What You Don’t Know About Making Decisions

    by David A. Garvin and Michael A. Roberto

    Who Has the D?

    by Paul Rogers and Marcia Blenko

    How (Un)ethical Are You?

    by Mahzarin R. Banaji, Max H. Bazerman, and Dolly Chugh

    Make Better Decisions

    by Thomas H. Davenport

    Why Good Leaders Make Bad Decisions

    by Andrew Campbell, Jo Whitehead, and Sydney Finkelstein

    Stop Making Plans; Start Making Decisions

    by Michael C. Mankins and Richard Steele

    About the Contributors

    Index

    The Hidden Traps in Decision Making

    by John S. Hammond, Ralph L. Keeney, and Howard Raiffa

    MAKING DECISIONS IS THE MOST important job of any executive. It’s also the toughest and the riskiest. Bad decisions can damage a business and a career, sometimes irreparably. So where do bad decisions come from? In many cases, they can be traced back to the way the decisions were made—the alternatives were not clearly defined, the right information was not collected, the costs and benefits were not accurately weighed. But sometimes the fault lies not in the decision-making process but rather in the mind of the decision maker. The way the human brain works can sabotage our decisions.

    Researchers have been studying the way our minds function in making decisions for half a century. This research, in the laboratory and in the field, has revealed that we use unconscious routines to cope with the complexity inherent in most decisions. These routines, known as heuristics, serve us well in most situations. In judging distance, for example, our minds frequently rely on a heuristic that equates clarity with proximity. The clearer an object appears, the closer we judge it to be. The fuzzier it appears, the farther away we assume it must be. This simple mental shortcut helps us to make the continuous stream of distance judgments required to navigate the world.

    Yet, like most heuristics, it is not foolproof. On days that are hazier than normal, our eyes will tend to trick our minds into thinking that things are more distant than they actually are. Because the resulting distortion poses few dangers for most of us, we can safely ignore it. For airline pilots, though, the distortion can be catastrophic. That’s why pilots are trained to use objective measures of distance in addition to their vision.

    Researchers have identified a whole series of such flaws in the way we think in making decisions. Some, like the heuristic for clarity, are sensory misperceptions. Others take the form of biases. Others appear simply as irrational anomalies in our thinking. What makes all these traps so dangerous is their invisibility. Because they are hardwired into our thinking process, we fail to recognize them—even as we fall right into them.

    For executives, whose success hinges on the many day-to-day decisions they make or approve, the psychological traps are especially dangerous. They can undermine everything from new-product development to acquisition and divestiture strategy to succession planning. While no one can rid his or her mind of these ingrained flaws, anyone can follow the lead of airline pilots and learn to understand the traps and compensate for them.

    In this article, we examine a number of well-documented psychological traps that are particularly likely to undermine business decisions. In addition to reviewing the causes and manifestations of these traps, we offer some specific ways managers can guard against them. It’s important to remember, though, that the best defense is always awareness. Executives who attempt to familiarize themselves with these traps and the diverse forms they take will be better able to ensure that the decisions they make are sound and that the recommendations proposed by subordinates or associates are reliable.

    The Anchoring Trap

    How would you answer these two questions?

    • Is the population of Turkey greater than 35 million?

    • What’s your best estimate of Turkey’s population?

    Idea in Brief

    Bad decisions can often be traced back to the way the decisions were made—the alternatives were not clearly defined, the right information was not collected, the costs and benefits were not accurately weighed. But sometimes the fault lies not in the decision-making process but rather in the mind of the decision maker: The way the human brain works can sabotage the choices we make. In this article, first published in 1998, John S. Hammond, Ralph L. Keeney, and Howard Raiffa examine eight psychological traps that can affect the way we make business decisions. The anchoring trap leads us to give disproportionate weight to the first information we receive. The status-quo trap biases us toward maintaining the current situation—even when better alternatives exist. The sunk-cost trap inclines us to perpetuate the mistakes of the past. The confirming-evidence trap leads us to seek out information supporting an existing predilection and to discount opposing information. The framing trap occurs when we misstate a problem, undermining the entire decision-making process. The overconfidence trap makes us overestimate the accuracy of our forecasts. The prudence trap leads us to be overcautious when we make estimates about uncertain events. And the recallability trap prompts us to give undue weight to recent, dramatic events. The best way to avoid all the traps is awareness: forewarned is forearmed. But executives can also take other simple steps to protect themselves and their organizations from these mental lapses to ensure that their important business decisions are sound and reliable.

    If you’re like most people, the figure of 35 million cited in the first question (a figure we chose arbitrarily) influenced your answer to the second question. Over the years, we’ve posed those questions to many groups of people. In half the cases, we used 35 million in the first question; in the other half, we used 100 million. Without fail, the answers to the second question increase by many millions when the larger figure is used in the first question. This simple test illustrates the common and often pernicious mental phenomenon known as anchoring. When considering a decision, the mind gives disproportionate weight to the first information it receives. Initial impressions, estimates, or data anchor subsequent thoughts and judgments.

    Anchors take many guises. They can be as simple and seemingly innocuous as a comment offered by a colleague or a statistic appearing in the morning newspaper. They can be as insidious as a stereotype about a person’s skin color, accent, or dress. In business, one of the most common types of anchors is a past event or trend. A marketer attempting to project the sales of a product for the coming year often begins by looking at the sales volumes for past years. The old numbers become anchors, which the forecaster then adjusts based on other factors. This approach, while it may lead to a reasonably accurate estimate, tends to give too much weight to past events and not enough weight to other factors. In situations characterized by rapid changes in the marketplace, historical anchors can lead to poor forecasts and, in turn, misguided choices.

    Because anchors can establish the terms on which a decision will be made, they are often used as a bargaining tactic by savvy negotiators. Consider the experience of a large consulting firm that was searching for new office space in San Francisco. Working with a commercial real-estate broker, the firm’s partners identified a building that met all their criteria, and they set up a meeting with the building’s owners. The owners opened the meeting by laying out the terms of a proposed contract: a ten-year lease; an initial monthly price of $2.50 per square foot; annual price increases at the prevailing inflation rate; all interior improvements to be the tenant’s responsibility; an option for the tenant to extend the lease for ten additional years under the same terms. Although the price was at the high end of current market rates, the consultants made a relatively modest counteroffer. They proposed an initial price in the midrange of market rates and asked the owners to share in the renovation expenses, but they accepted all the other terms. The consultants could have been much more aggressive and creative in their counterproposal—reducing the initial price to the low end of market rates, adjusting rates biennially rather than annually, putting a cap on the increases, defining different terms for extending the lease, and so forth—but their thinking was guided by the owners’ initial proposal. The consultants had fallen into the anchoring trap, and as a result, they ended up paying a lot more for the space than they had to.

    What can you do about it?

    The effect of anchors in decision making has been documented in thousands of experiments. Anchors influence the decisions not only of managers, but also of accountants and engineers, bankers and lawyers, consultants and stock analysts. No one can avoid their influence; they’re just too widespread. But managers who are aware of the dangers of anchors can reduce their impact by using the following techniques:

    • Always view a problem from different perspectives. Try using alternative starting points and approaches rather than sticking with the first line of thought that occurs to you.

    • Think about the problem on your own before consulting others to avoid becoming anchored by their ideas.

    • Be open-minded. Seek information and opinions from a variety of people to widen your frame of reference and to push your mind in fresh directions.

    • Be careful to avoid anchoring your advisers, consultants, and others from whom you solicit information and counsel. Tell them as little as possible about your own ideas, estimates, and tentative decisions. If you reveal too much, your own preconceptions may simply come back to you.

    • Be particularly wary of anchors in negotiations. Think through your position before any negotiation begins in order to avoid being anchored by the other party’s initial proposal. At the same time, look for opportunities to use anchors to your own advantage—if you’re the seller, for example, suggest a high, but defensible, price as an opening gambit.

    The Status-Quo Trap

    We all like to believe that we make decisions rationally and objectively. But the fact is, we all carry biases, and those biases influence the choices we make. Decision makers display, for example, a strong bias toward alternatives that perpetuate the status quo. On a broad scale, we can see this tendency whenever a radically new product is introduced. The first automobiles, revealingly called horseless carriages, looked very much like the buggies they replaced. The first electronic newspapers appearing on the World Wide Web looked very much like their print precursors.

    On a more familiar level, you may have succumbed to this bias in your personal financial decisions. People sometimes, for example, inherit shares of stock that they would never have bought themselves. Although it would be a straightforward, inexpensive proposition to sell those shares and put the money into a different investment, a surprising number of people don’t sell. They find the status quo comfortable, and they avoid taking action that would upset it. Maybe I’ll rethink it later, they say. But later is usually never.

    The source of the status-quo trap lies deep within our psyches, in our desire to protect our egos from damage. Breaking from the status quo means taking action, and when we take action, we take responsibility, thus opening ourselves to criticism and to regret. Not surprisingly, we naturally look for reasons to do nothing. Sticking with the status quo represents, in most cases, the safer course because it puts us at less psychological risk.

    Many experiments have shown the magnetic attraction of the status quo. In one, a group of people were randomly given one of two gifts of approximately the same value—half received a mug, the other half a Swiss chocolate bar. They were then told that they could easily exchange the gift they received for the other gift. While you might expect that about half would have wanted to make the exchange, only one in ten actually did. The status quo exerted its power even though it had been arbitrarily established only minutes before.

    Other experiments have shown that the more choices you are given, the more pull the status quo has. More people will, for instance, choose the status quo when there are two alternatives to it rather than one: A and B instead of just A. Why? Choosing between A and B requires additional effort; selecting the status quo avoids that effort.

    In business, where sins of commission (doing something) tend to be punished much more severely than sins of omission (doing nothing), the status quo holds a particularly strong attraction. Many mergers, for example, founder because the acquiring company avoids taking swift action to impose a new, more appropriate management structure on the acquired company. Let’s not rock the boat right now, the typical reasoning goes. Let’s wait until the situation stabilizes. But as time passes, the existing structure becomes more entrenched, and altering it becomes harder, not easier. Having failed to seize the occasion when change would have been expected, management finds itself stuck with the status quo.

    What can you do about it?

    First of all, remember that in any given decision, maintaining the status quo may indeed be the best choice, but you don’t want to choose it just because it is comfortable. Once you become aware of the status-quo trap, you can use these techniques to lessen its pull:

    • Always remind yourself of your objectives and examine how they would be served by the status quo. You may find that elements of the current situation act as barriers to your goals.

    • Never think of the status quo as your only alternative. Identify other options and use them as counterbalances, carefully evaluating all the pluses and minuses.

    • Ask yourself whether you would choose the status-quo alternative if, in fact, it weren’t the status quo.

    • Avoid exaggerating the effort or cost involved in switching from the status quo.

    • Remember that the desirability of the status quo will change over time. When comparing alternatives, always evaluate

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