Posts Tagged ‘Risk taking’

“If you are succeeding in everything you do, then you’re probably not pushing yourself hard enough. And that means you’re not taking enough risks. You risk because you have something of value you want to achieve.” (John C. Maxwell, Failing Forward)

On the other hand,

The planning fallacy, “[i]n its grip, managers make decisions based on delusional optimism rather than on rational weighting of gains, losses, and probabilities.”  (Dan Lovallo and Daniel Kahneman, Delusions of Success: How Optimism Undermines Executive’s Decisions, Harvard Business Review, July 2003)

Planning fallacy is not limited to cost overruns, errors in timelines, loss of shareholder value.  Planning fallacy can also result in loss of lives, as in the decisions by the the United States to invade Afghanistan and Iraq.

Risk is everywhere. You can’t avoid it. You begin your day with risk, you can get hurt getting out of bed. The question is, how do you assess risk?

“Embrace adversity and make failure a regular part of your life. If you’re not failing, you’re probably not really moving forward.” (John C. Maxwell, Failing Forward)

On the other hand,

Lovallo and Kahneman write, “In planning major initiatives, executives routinely exaggerate the benefits and discount the costs, setting themselves up for failure.”

“[B]usiness leaders routinely exaggerate their personal abilities, particularly for ambiguous, hard-to-measure traits like managerial skill. Their self-confidence can lead them to assume that they’ll be able to avoid or easily overcome potential problems in executing a project. This misapprehension is further exaggerated by managers’ tendency to take personal credit for lucky breaks.”

“Managers are also prone to the illusion that they are in control….They see risk as a challenge to be met by the exercise of skill, and they believe results are determined purely by their own actions and those of their organizations.”

Failure is bound to happen. The question is, how do you ensure that your decision making process moderates optimism and other biases to reduce the opportunity for failure?

The following three articles provide options for addressing and mitigating decision making biases.

In The case for behavioral strategy, Dan Lovallo and Olivier Sibony present the case that developing a “process for strategic decision making requires an understanding of the biases the process needs to address.” (McKinsey Quarterly, March 2010) The article presents some common biases and options for countering them.

“[O]ne of things an unbiased decision-making process will do is ferret out poor analysis. The reverse is not true; superb analysis is useless unless the decision process gives it a fair hearing.”

“Improving strategic decision making therefore requires not only trying to limit our own (and others’) biases but also orchestrating a decisionmaking process that will confront different biases and limit their impact.”

“[P]opulating meetings or teams with participants whose interests clash can reduce the likelihood that one set of interests will undermine thoughtful decision making.”

Kahneman, Lovallo, and Sibony provide a decision quality control checklist in The Big Idea: Before You Make That Big Decision... (Harvard Business Review; June 2011)  The checklist has 12 questions in three categories:

  • questions the decision makers should ask themselves,
  • questions they should use to challenge the people proposing a course of action, and
  • questions aimed at evaluating the proposal.

A third option is the premortem, a technique was developed by Gary Klein. (Performing a Project Premortem, Harvard Business Review, September 2007)

“A typical premortem begins after the team has been briefed on the plan. The leader starts the exercise by informing everyone that the project has failed spectacularly. Over the next few minutes those in the room independently write down every reason they can think of for the failure — especially the kinds of things they ordinarily wouldn’t mention as potential problems, for fear of being impolitic.”

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