For a long time one of the core beliefs of economists was that given all relevant information, a person would make a rational choice given different alternatives. Hence, the explanation for all irrational decisions made was that not all information was available. The research by Kahneman and Tversky, 2002 Nobel Prize winners in economics, showed with prospect theory, that even with all relevant information, even experts make irrational choices.
Kahneman and Tversky’s research attracted significant interest from the financial services industry keen to improve its understanding of investment choices and decisions and during the last few years research into behavioural finance has increased. Behavioural finance seeks to analyse and explain the typical mistakes – behavioural biases – made by investors.
Financial markets are complex and so is international business, where market developments are becoming more unpredictable and whole industries are being disrupted by new technology, different market models and innovative digital start-ups.
So how closely do investors monitor the behavioural biases in the decision making of senior management in global industries? And to what extent do industry leaders themselves take an interest in gaining insight into their decision making? Can they recognise their own decision making shortcomings?
Essenta has conducted leadership decision making research for the last two years involving international top managers and their ability to assess interpret complex information and how they use it in complex decision making.
One aspect we investigated was the leaders’ own perception of their ability to interpret complex information and their decision making ability. Not surprisingly we found a very strong illusory superiority, also known as the “above average bias”.
Another aspect was how to interpret probabilities of different business alternatives and thirdly how to balance multiple pieces of information when making a decision.
The results showed that less than 15% of leaders accurately interpreted the numeric information, or reached an accurate decision when the number of pieces of information exceeded 5 items.
When a lot of money hinges on good decisions in complex business situations, a robust and detailed decision making process can help improve the quality of decisions.
Investors have long known that top management and their decisions is a key ingredient for a successful stewardship of a company.
Perhaps the complexity of business and how decisions are made, should become equally important for boards appointing senior management and for an employee choosing a new employer.
Decision making can be improved with training and by breaking complex situations down into smaller segments.
To complex for comfort? It needn’t be.
Lani Bannach heads up Essenta – a company delivering organisational change, using neuroscientific and other scientific evidence-based techniques and tools, combined with business acumen and experience.