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Behavioral Strategy and the CLO
Even with the best information, cognitive bias may skew our decisions to the detriment of business and leadership.
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.
Leveraging the Latest in Brain Science to Deliver the Next Generation of E-Learning
May 29th 1:00pm - 2:00pm CT
2013 CLO Breakfast Club, Boston
September 12th - 12th, 2013The Westin Copley Place
Fall 2013 CLO Symposium
September 30th - October 2nd, 2013Rancho Las Palmas Resort & Spa
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