| In the current business environment, bias in | | | | buy. However, as the economy ebbs and flows, we |
| decision-making is to be expected given that we | | | | have no black box or hard-and-fast rules to help us |
| have operated in a business-as-usual environment for | | | | improve our forecasting abilities. Strategic decision |
| stretches of decades-with only a few recessions and | | | | makers are more influenced by, yet fail to |
| other small bumps along the way. There are dozens | | | | understand, the cognitive biases that inform their |
| of biases that affect our decision making, but some | | | | decision making, concludes the McKinsey study. |
| of these biases affect our perceptions more than | | | | De-biasing Your Strategic Planning |
| others in dynamic environments. One such bias is | | | | Before embarking on external business environment |
| optimism. We have a tendency to overrate our own | | | | scanning, behavioral economists argue, we need to |
| self-efficacy or ability to meet the challenges ahead. | | | | let go of preconceptions and biases that can |
| We also tend to be overly optimistic about the | | | | negatively influence our strategic decision making. In |
| future. | | | | addition to optimism, examples of other |
| Over-optimism bias | | | | decision-making biases that you should consider in the |
| When hiring a sales manager, over-optimism might be | | | | strategic planning process include loss aversion, risk |
| a positive trait that can contribute to success. But in | | | | aversion, the principal-agent problem, the framing |
| decision making, bravado can cause strategic and | | | | effect (taking a narrow view), and the illusion of |
| contingency plans to fall short of dealing with the | | | | control. |
| challenges in front of us. Fortunately, analysts and | | | | An overarching failure in today's decision-making is |
| shareholders are two rational stakeholders, who may | | | | screening out the normalcy bias, made all the more |
| force us to act in a more rational manner. This could | | | | complex by the fact that we do not yet know what |
| partly explain why, tempered by more rational heads, | | | | the new normal is. Under each bias, consider making |
| public companies outperform private companies. | | | | lists of bias traps that you may be prone to fall into: |
| Similarly, companies supported by the active and | | | | - Are you underestimating the rate at which your |
| rational influences of private equity investors, such as | | | | business can be commoditized? |
| buyout or venture capital funds, outperform other | | | | - Is recent history now the new normal? |
| private peers. These private equity investors exert a | | | | - Is your competitive advantage being commoditized? |
| significant influence on rational behavior. | | | | - Can you continue to compete with outsourced |
| Rational decision making | | | | services? |
| As a recent McKinsey article The Case for Behavioral | | | | - Have you adequately accounted for the effects of |
| Strategy saliently points out, rationality and behavior | | | | new regulation on your business? |
| are explored regularly in the investment market and, | | | | - Is your product development and innovation |
| arguably, have improved predictability and probabilities | | | | advancing at a pace that can compete with the |
| in the financial markets. Yet we do not apply the | | | | unknown competition ahead? |
| same rigorous behavioral analysis to our leadership | | | | - Have you adequately accounted for risks? |
| decisions. When the market exhibits a certain pattern, | | | | Cumulative and dynamic measures of risk? |
| a trading algorithm helps us decide whether to sell or | | | | |