Fog-Colored Glasses: Bias and overconfidence in business decisions, by Mark Chussil
A slightly edited version of this essay appeared in the January/March 2014 issue of Competitive Intelligence Magazine.
A psychic can reinterpret or disavow a crystal ball. Forecasters and strategists aren’t so lucky. They must predict sales, costs, stock prices, market response, competitors’ actions, and more, always under uncertainty. People make decisions based on their predictions, and they want definitive numbers unclouded by “it depends” (which sounds to them like waffling) and “standard errors of estimates” (which sounds to them like Martian).
We often ask, how do we get better crystal balls? But the problem isn’t only that crystal balls are cloudy. Our vision can be cloudy too.
It’s Clear
While preparing for a business war game, I attended a workshop at a major advertising agency. The workshop was designed to help my client develop possible themes for its marketing.
During the workshop, the agency displayed several ads and asked the client’s managers to rate them. The managers unanimously rated one ad as having excellent clarity. Unanimously except for one. The facilitator asked the dissenter why he thought the ad wasn’t clear. He proceeded to thoroughly demolish the ad: this vagueness, that haziness, an ambiguity here, an innuendo there. When he was done, the rest of us were stunned that we’d thought the ad was clear. Moreover, we would have continued to think it an exemplar of clarity if he hadn’t spoken up.
By contrasting their beliefs in the workshop, the client didn’t just avoid an advertising blunder. They did something deeper, something humans usually don’t do: they agreed to challenge their thinking. If we merely rehearse what we already know, we are not learning; we are reinforcing.
Believing is Believing
Unfortunately, reinforcing is what we humans like to do. We tend to seek and keep facts consistent with our beliefs. (Psychologists call that confirmation bias.) We tend to discredit or avoid that which conflicts with our beliefs. When’s the last time you bought and read a book by an author with whose views you expected to disagree? (I don’t do it either.) Yet the truth is that some of what we accept as truth is not true.
Having conducted hundreds of business war games, I’ve observed really smart strategists arrive being sure of the right answer (and sometimes even wondering why they’re about to waste their time in the war game), and leave being sure of a different right answer. What is it about business war games that, like the advertising workshop, helps people see different solutions?
To answer that question, we’ll talk for a moment about the accuracy of our beliefs.
Calibration
“Calibration” refers to the match between confidence and accuracy. Weather forecasters are well-calibrated when they predict precipitation (e.g., when they say there’s a 70% chance of precipitation, it precipitates 70% of the time). Doctors are not well-calibrated when they diagnose pneumonia (they are overconfident).
According to Scott Plous, “The most effective way to improve calibration seems to be very simple: Stop to consider reasons why your judgment might be wrong.”
Experiments show that generating reasons in support of a preferred answer does not reduce overconfidence. Generating reasons that oppose the preferred answer does reduce overconfidence.
When you are appropriately confident in an answer, you are more likely to make wise decisions. With your fog-colored glasses removed, the crystal ball looks less cloudy.
Surface-level opposing reasons probably won’t help much. If our profit forecast assumes 5.0% sales growth, then objecting that growth might reach only 4.8% probably won’t lead to any celestial-choir-singing insights.
Generating valuable opposing reasons means challenging what we believe is clear, obvious, and profoundly true. Here are some directions those objections might go.
- That 5% sales-growth assumption comes from extrapolating trend lines into the future. Our market is changing; there’s no reason to think the past will predict the future.
- Our competitors have announced their growth plans, and they say their new products will trash ours. We’re going to be in a real battle to get any growth.
- Analysts say the market is going to be flat this year. For us to grow at 5% in a flat market, our competitors will have to lose market share. They’re just as hungry for growth as we are.
- That sales-growth number is what the finance department wants us to get. That doesn’t mean it’s possible. Does sales think they can deliver?
- Our profit forecasts don’t take price into account. We might have to cut prices to grow sales at 5%, and if we do, then profits aren’t going to hit the target.
We can challenge our thinking and get a better look at the crystal ball by creating a marketplace of ideas. There are various ways to do so.
A Marketplace of Ideas
A monopoly of ideas is to decisions what a monopoly of products is to purchases: a lousy selection from a complacent supplier. A marketplace of ideas implies competition and an active search for alternatives; that is, opposing reasons.
Change how strategy ideas are presented to decision makers. A.G. Lafley, CEO of Procter & Gamble, “always asks managers to give him two different approaches and present the pros and cons of each” before he makes a decision or sets a new strategy. (WSJ, 2/13/06)
Look outside your industry. You can get ideas from what others have done. Imagine what Steve Jobs, Ted Turner, Sir Richard Branson, or Steven Spielberg would do if they ran your company… or one of your competitors’.
Ask strange questions. What would happen if we didn’t take this action? What could we do if we had more resources? What could we do that would make customers happy to pay a premium price? What would happen if we go down this road and we get half, or double, of what we expected? What’s a possible disaster that could affect our whole market, and how can we prepare for it? (Given the various crises going on, I think it’s safe to say that that last question hasn’t been asked often enough.)
Conduct business war games. By their very nature, business war games force you to get inside competitors’ and customers’ heads. Generating opposing reasons is at their core because your own really smart people, role-playing competitors, do their best to cause your virtual defeat.
Emphasize cause and effect. Avoid accounting-based models or trend-line predictions, because they reflect unrealistic views of how the future comes to be. Things happen for reason, and if those causal-things change (or if you make them change), then you can “change” the future.
To make better competitive-strategy predictions and decisions — you know, the kind that can make or break your business — challenge your thinking, look for opposing reasons, deregulate your company’s marketplace of ideas. Got any reasons why not?