Book Review of On Making Smart Decisions by Cameron Dawley

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Author: Harvard Business Review
Sponsors: Tom Healey, Doug Keith, Cyril Moulle-Berteaux
Title: On Making Smart Decisions (Buy the Book)

Summary:

Harvard Business Review’s On Making Smart Decisions is a collection of articles dedicated to helping organizations understand and implement effective and efficient decision-making strategies. Why is effective and efficient decision making important? Because the success or failure of any organization depends on the quality of the decisions it makes.

Despite this, most organizations don’t focus on decision-making strategies, resulting in missed opportunities, unaddressed threats, and a loss of competitive advantage in the market.

Developing effective and efficient decision-making strategies is key to the success of any organization. The following are three areas organizations must focus on to develop effective and efficient decision making: understanding unconscious bias, systematic approaches to better decisions, and culture.

Understanding Unconscious Bias:

The first step in understanding unconscious bias is understanding the two types of thinking outlined in Before You Make That Big Decision…

System One: Intuitive Thinking

  • Flows effortlessly
  • Not consciously focused – automatic
  • Produces single coherent interpretation of surroundings

System Two: Reflective Thinking

  • Slow, effortful, and deliberate
  • Consciously focused
  • Analytical in nature

Both systems are continuously active, however, most of the mental work done in life is unconscious System One thinking. This thinking gives people the ability to quickly recognize patterns, make assumptions, and shortcut decision making. While reliable for most aspects of life, it is inherently flawed because of the influence of unconscious bias; where background, personal experience, environment, societal stereotypes, and cultural context unconsciously impact decision making.

Even the most well-intentioned and intellectual people of the world fall into the trap of unconscious bias. For leaders, the first step in combating unconscious bias is awareness of its existence and understanding of its negative impacts. This must be followed up with systematic approaches that actively combat the negative effects of unconscious bias.

Systematic Approaches to Better Decisions:

Organizations need to realize that a disciplined decision-making process, not individual genius, is the key to sound strategy”

A study by Mckinsey & Company of over 1,000 business investments showed that when organizations approached decision making systematically, they experienced returns up to seven percentage points higher.

Harvard Business Review’s collection of articles outlined three effective systematic approaches to help organizations combat the negative effects of bias in the decision-making process.

Review of the Recommendation Process:

Before You Make That Big Decision… recommends a 12-question checklist to combat the effects of unconscious bias in the recommendation process. The questions fall into three categories:

  1. Questions the decision-maker should ask themselves
  2. Questions the decision-maker should ask the recommending team
  3. Questions focused on evaluating the proposal itself

Continuous, Decision Oriented Planning:

Stop Planning; Start Making Decisions recommends ‘Continuous, Decision-Oriented Planning’ in which organizations continually identify and resolve strategic issues. The three keys to making this approach effective:

  1. Focus on a key few themes
  2. Make strategy development continuous
  3. Strategy reviews must produce concrete decisions

Recognizing and Addressing Near Misses:

In the business world, near misses are “small failures that permeate day-to-day business but cause no immediate harm.” However, the only difference between crisis and a near miss is simply luck.

How to Avoid Catastrophe recommends seven strategies to help organizations recognize and address near misses, thus avoiding catastrophe.

Culture:

Culture is the foundation on which awareness, systematic approaches, and ultimately, effective and efficient decision making is built.  It is up to the leaders of any organization to model the culture which promotes making smart decisions. How does one create such a culture? By first focusing on dialogue.

In Conquering a Culture of Indecision, author Ram Charan argues that “dialogue is the basic unit of work in an organization.” It is the medium through which ideas are created, shared, and challenged and it is the most important factor in the performance of an organization. Thus, leaders must model open, honest, and decisive dialogue.

Open, honest, and decisive dialogue promotes a culture of inquiry rather than advocacy, and leads to cognitive conflict, meaningful consideration, and honest follow-through and feedback.  This not only produces a more thoughtful and decisive organization but one that is engaged and energized as well.

Final Thoughts:

Success or failure is ultimately determined by effective and efficient decision-making strategy. Organizations that wish to gain a competitive advantage in the market should critically reflect on their current decision making and put forth the intentional effort to implement ideas raised in this brief on Harvard Business Review’s collection of articles On Making Smart Decisions.

Introduction

Every day, people make countless number of decisions. Some big, others are small. Some consciously, others unconsciously. The personal and professional realms of life are filled with decisions. In both realms, quality decisions can be the difference between success and failure. For this reason, leaders are made or broken by the quality of their decisions. And subsequently, the success or failure of an organization depends on the quality of its decisions.

Which begs the question: why don’t organizations pay more attention to how they make decisions? Harvard Business Review’s collection of articles On Making Smart Decisions seeks to help organizations understand where decision making goes wrong and how to better it.

Top Ten Ideas an Executive Should Take Away from this Brief

  1. Recognize unconscious bias and its effects on decision making
  2. Combat unconscious bias in the review and recommendation process with the 12-question checklist
  3. Adopt Continuous, Decision-Oriented Strategic Planning
  4. Don’t let near misses turn into a catastrophe
  5. Challenge teams with worst-case scenarios and play devil’s advocate
  6. Model open, honest, and decisive dialogue
  7. Promote cognitive, constructive conflict
  8. Give consideration: let people know their voice has been heard
  9. Give honest feedback continuously throughout the year; do not let individuals or the organization settle for mediocrity
  10. Culture is the foundation on which smart decision making prospers

Synopsis

Harvard Business Review’s On Making Smart Decisions is a collection of articles on the competitive advantage gained through making effective and efficient decisions in business. The article summaries below will be followed by an analysis of the three most impactful themes discussed: understanding unconscious bias, systematic approaches to better decisions, and culture’s impact on decision making.

The Hidden Traps in Decision Making

John S. Hammond, Ralph L. Keeney, and Howard Raiffa. Originally published in January 2006.

While sometimes bad decisions can be traced back to how they were made, other times, it can be traced back to the way the brain operates. People’s choices can sometimes be sabotaged by the way the brain is hardwired. This article examines eight common psychological traps that can negatively impact business decisions. The authors argued that awareness is the best protection against these traps notably mentioning that “forewarned is forearmed.”

Before You Make That Big Decision…

Daniel Kahneman, Dan Lovallo, and Oliver Sibony. Originally published in June 2011.

When executives make big decisions, they often rely on the judgment of a team that has put together a proposal. Invariably, however, the team’s thinking will be affected by biases. It is important for executives to not only question the recommendation itself but to question the team’s thought process as well. This article recommends a 12-question checklist to be used to unearth and neutralize the effects of bias. A systematic and disciplined approach to decision making is key to the success of any organization.

How to Avoid Catastrophe

Catherine H. Tinsley, Robin L. Dillon, & Peter M. Madsen. Originally published in April 2011.

Most business failures are foreshadowed by near misses. While near misses should be an indication of a future crisis, they are often accepted as a success. However, the only difference between a catastrophe and a near miss is luck. This article outlines seven strategies that will help managers, leaders, and decision-makers develop the ability to recognize and learn from near misses.

Conquering a Culture of Indecision

Ram Charan. Originally published in April 2001.

Failure to execute is the greatest cause of underperformance in any organization and it stems from an inability to take decisive action. This article argues that a culture of indecision can be broken if leaders can do three things: engender intellectual honesty between people, create social operating mechanisms that promote honest dialogue and use feedback and follow-through to reward high achievers. In addition, leaders must constantly model the open and honest dialogue they expect from others.

What You Don’t Know About Making Decisions

David A. Garvin & Michael A. Roberto. Originally published in August 2001.

Leaders are made or broken by the quality of their decisions. However, most leaders get decision making wrong because they approach it with advocacy. This article argues that inquiry is a much more productive decision-making approach than advocacy. Inquiry promotes careful consideration of a variety of options, teamwork to discover the best solutions, and creative thinking. Inquiry is accomplished by mastering the “three C’s” of decision making: conflict, consideration, and closure.

Who Has the D?

Paul Rogers & Marcia Blenko. Originally published in January 2006.

Success, failure, opportunities seized, and opportunities missed all stem from someone making or failing to make a decision. In many organizations, decision making stalls due to ambiguity over who is responsible for making the decision. This article recommends the RAPID model for assigning roles and responsibilities for every strategic decision. The roles and responsibilities fall into the five categories of Recommend, Agree, Perform, Input, and Decide. Implementation of the RAPID model results in swift and effective decision making.

How (Un)ethical Are You?

Mahzarin Banaji, Max Bazerman, & Dolly Chugh. Originally published in December 2003.

While most people would like to believe they are unbiased and ethical decision makers, the truth is, everyone harbors unconscious and unethical biases that lead decision making astray. Managers can take deliberate actions to counteract the pull of unconscious biases by: collecting data and auditing their decisions, shaping their environments to challenge their biases, and broadening their decision making by considering counter-intuitive options.

Make Better Decisions

Thomas H. Davenport. Originally published in November 2009.

Despite the growing number of business books with insights into the decision process, organizations have been slow to adopt recommendations. Davenport suggests four steps to better decision making in an organization: (1) list and prioritize decisions that must be made; (2) identify factors that play into each decision; (3) design roles, processes, systems, and behaviors the organization needs; and (4) institutionalize tools and assistance for decision making.

Why Good Leaders Make Bad Decisions

Andrew Campbell, Jo Whitehead, & Sydney Finkelstein. Originally published in February 2009.

Even the most well-intentioned and intelligent people are at times hopelessly flawed in their decision making. Most commonly, there are three “red flag conditions” that distort thinking: conflict of interest, attachment, and misleading memories. People can combat these biases by injecting fresh experience or analysis, introducing further debate or challenge, and imposing stronger governance. These safeguards help prevent errors in judgment during the decision- making the process.

Stop Making Plans; Start Making Decisions

Michael C. Mankins & Richard Steele. Originally published in January 2006.

Traditional strategic planning is constrained by time (performed annually) and by unit (unfolds unit by unit) resulting in strategic decisions that are made incorrectly, slowly, or not at all. This article proposes the use of continuous issues-focused strategic planning to combat the negative effects of traditional strategic planning. This is accomplished by identifying issues that need resolving, debating issues one at a time until a decision is reached, and continually updating the agenda to reflect business realities.

Unconscious Bias

What is Unconscious Bias?

Before You Make That Big Decision… describes two types of thinking. The first type of thinking is called System One, or intuitive thinking. This type of thinking flows effortlessly. People are not consciously thinking of how they do things; they just do them. On the contrary, System Two, or reflective thinking, is slow, effortful, and deliberate. The two systems are continuously active, however, System One determines most thoughts and allows people to deal with the complexity inherent in most decisions.

Most of the mental work done in life is unconscious. The brain has developed the ability to recognize patterns, make assumptions, and shortcut decision making. The issue is that the patterns, assumptions, and shortcuts the brain takes are not foolproof.

The brain can lead people astray in the form of unconscious bias. This is where background, personal experience, environment, societal stereotypes, and cultural context unconsciously impact people’s decision making. Because this way of thinking is hardwired in the brain, people often fail to recognize its danger and its impact.

Even the most well-intentioned and intellectual people of the world fall into the trap of unconscious bias. For executives, whose success is determined by the decisions they make every day, it is important to first understand the traps before learning how to combat them.

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Different Types of Unconscious Bias Traps

AnchoringBias: During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments.

Status-Quo Bias:  When  people  break  the  status-quo,  they  take  responsibility  and  expose themselves to risk and failure. Decision makers display a bias for alternatives that perpetuate the status-quo.

Sunk-Cost Bias: When people make choices to justify past choices, even when those past choices no longer seem valid. This stems from an unwillingness, consciously or unconsciously, to admit past mistakes.

Confirming-EvidenceBias: The tendency to accept supporting information and reject conflicting information.

Saliency Bias: Letting present decisions be affected by past successes or failures of similar nature. The concern with this bias is that the past event is not as similar as we’d like to think.

Groupthink Bias: When decision makers strive for unanimity, this can override their motivation to consider alternative views.

OverconfidenceBias: When a person’s subjective confidence in their own judgements is reliably greater than the objective accuracy of those judgements.

In-Group Bias: A pattern of favoring members of similar groups over members not like oneself.

Loss Aversion Bias: People’s tendency to avoid losses to acquire equivalent gains.

NormalizationofDeviance: When people within an organization become accustomed to deviant behavior to the point where they now consider it normal.

Awareness: “Forewarned is Forearmed” or is it?

In The Hidden Traps of Decision Making, the authors argue that the best protection against the traps posed by unconscious bias is awareness. Awareness of these traps gives people the ability to uncover errors in thinking before they become errors in judgement, thus giving people more confidence in their ability to make decisions. However, the opinion argued in Before You Make That Big Decision… is that awareness is just the first step. Talk alone has not proven to better decision making.

The difficulty with unconscious bias is that it is very difficult for people to catch themselves in the middle of making these errors, even if they are aware of their existence.

Awareness, while a step in the right direction, is not enough to help overcome the negative effects unconscious bias has on decision making. In addition to developing awareness, organizations must develop systematic approaches to effectively combat the negative effects of unconscious bias.

Systematic Approaches to Better Decisions

Review of the Recommendation Process

In an effort to combat the effects on unconscious bias in the recommendation process, Before You Make That Big Decision… proposes using a systematic review. This approach gives organizations the ability to retrace steps in its thinking to check for areas where unconscious bias may have steered them in the wrong direction. Outlined below is their 12-question checklist tool:

Questions the decision maker should ask themselves

  1. Is there any reason to suspect errors driven by self-interest of the team?
  2. Have the people making the recommendation fallen in love with it?
  3. Were there dissenting opinions within the recommending team?

Questions the decision maker should ask the recommending team

  1. Could the diagnosis of the situation be overly influenced by salient analogies?
  2. Have credible alternatives been considered?
  3. If this decision had to be made again in a year, what other information would be asked for?
  4. Do they know where the numbers come from?
  5. Does the halo effect exist?
  6. Is the team overly attached to past decisions?

Questions focused on evaluating the proposal itself

  1. Is the base case overly optimistic?
  2. Is the worst case bad enough?
  3. Is the recommending team overly cautious?

This tool is helpful specifically when executives are relying on others’ evaluations to make decisions. When using this tool, the executive should be completely removed from the recommendation process and refrain from indicating preferences in advance.

Depending on the organization’s needs, this tool can be tweaked to best fit the organization. However, the use of this tool, or one like it, must be disciplined. Results are best achieved by going through the checklist completely and thoroughly each time it is used. The final paragraph in Before You Make That Big Decision… sums it up best:

Organizations need to realize that a disciplined decision-making process, not individual genius, is the key to sound strategy”

How to Approach Strategic Planning

The traditional strategic planning process is flawed. The traditional process, which is typically conducted annually and unit by unit, does not allow organizations to respond swiftly. The result: missed opportunities, unaddressed threats, and strategic planning that doesn’t drive strategic decision making.

In Stop Planning Plans; Start Making Decisions, authors Mankins and Steele propose the adoption of ‘Continuous, Decision-Oriented Planning’. This involves continuous identification and systematic resolution of strategic issues. Below is an example of such approach:

Continuous, Decision-Oriented Planning’ approach with graphics

The key difference of this approach is that it takes decision making out of the planning process. Instead, key issues that require a decision are identified and the agenda is updated. When meeting, concrete decisions are made, and the planning process updated.

The three keys to making Continuous, Decision-Oriented Planning successful:

  1. Focus on a few key themes
  2. Make strategy development continuous
  3. Strategy reviews must produce concrete decisions

Recognizing and Addressing Near Misses

Surfacing near misses and correcting root causes is one of the soundest investments an organization can make”

In the business world, near misses are “small failures that permeate day-to-day business but cause no immediate harm.” They are typically misinterpreted or ignored, and normal operations continue without further examination.

Why? Because too often individuals in an organization become complacent with near misses that involved a successful outcome. Cognitive biases begin to accept the anomalies as normal, however, the only difference between a crisis and a near miss is luck and an enabling condition.

Crisis = latent errors + enabling condition

Near Miss = latent errors + luck (no enabling condition)

Unfortunately, however, near misses foreshadow crisis and catastrophe. Eventually, luck runs out. And for this reason, businesses must learn to recognize and prevent near misses. To do so, How to Avoid Catastrophe recommends seven strategies:

1.   Heed high pressure

Higher pressure typically results in greater normalization of deviance, greater acceptance of near misses. To combat this, require individuals in high-pressure work to ask themselves: “If there was more time and resources, would the same decision be made?”

2.   Learn from deviations

Organizations should encourage individuals, especially managers, to seek out deviant operations. When found, they should ask: “Has this organization always been comfortable with this level of risk?”

3.   Uncover root causes

Too often, organizations treat the symptom, not the cause. When deviant operations are uncovered, encourage individuals to discover the true cause.

4.   Demand accountability

Do not allow individuals to downgrade near misses. When near misses occur, require managers to justify their assessment of them.

5.   Consider worst case scenarios

Requiring individuals to examine the outcomes of events closely, such as a possible worst- case scenario, often results in their ability to differentiate between success and a near miss. Recognizing near misses then encourages them to alter decision making.

6.   Evaluate projects at every stage

Upon reaching milestones in projects, take time to reflect on past events leading up to that milestone. Doing so will uncover mishaps and successes, and better guide decision making in the future.

7.   Reward owning up

Give individuals motivation to expose near misses, even if they are the cause of the near miss itself. There is no benefit to the organization for employees to keep near misses secret.

Creating a Culture that Promotes Smart Decision Making

Conquering a Culture of Indecision and What You Don’t Know About Making Decisions are some of the most impactful articles in this series. Both articles address the importance culture plays in decision making, and subsequently, the success of any organization.

Culture is the foundation that supports the awareness and systematic approaches addressed earlier. It is the responsibility of leaders to create, model, and promote the culture of any organization.

Dialogue

“Dialogue is the basic unit of work in an organization”

Dialogue is the medium through which ideas are created, shared, and challenged. It dictates an individual’s gathering and processing of information, feelings, and ultimately, decision making. It is the single most important factor in the productivity, growth, and performance of an organization and its individuals.

Open, honest, and decisive dialogue promotes inquiry rather than advocacy. With inquiry comes the ability to make seemingly fragmented ideas whole, the ability for tensions to surface and resolve, and the ability to stimulate creative thinking. Having accomplished this, when decisions are made the individuals involved are emotionally compelled to act. Leaders must set the tone for dialogue in the organization.

They must model open, honest, and decisive dialogue. Doing so is crucial to creating a culture that promotes cognitive conflict, meaningful consideration, honest follow-through and feedback, and ultimately, smart decision making.

Conflict

Conflict is unavoidable in the realm of business, especially when it comes to decision making. It is imperative that organizations promote conflict that is constructive, not destructive. The difference is cognitive conflict and affective conflict. Cognitive conflict involves disagreements over ideas, assumptions, and the work itself and is productive in nature. Contrarily, affective

conflict is emotional and involves personal friction, rivalries, and clashing personalities. The benefit of cognitive conflict is that it produces more wholesome ideas and higher quality decisions. While both types of conflict will almost always exist, the challenge for leaders of any organization is to maximize cognitive conflict and minimize affective conflict. Techniques for accomplishing this feat as a leader include:

  1. Setting ground rules for language allowed in meetings/debates
  2. Be prepared to use “time-outs” when discussion gets too heated
  3. Test every argument with unexpected, out of the box, and contrary ideas
  4. Assign one team to provide a recommendation and another to provide alternatives
  5. Take the personal sting out of contrary remarks
    Ex. “Your argument makes sense, but let me play devil’s advocate for a moment…”
  6. Breakup preestablished coalitions and assign tasks outside traditional loyalties
  7. Ask individuals to research and argue positions they initially opposed
  8. Be willing to revisit topics when gridlock occurs
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Consideration

When decisions are made after a debate, it often means there are individuals whose preferred solution will have been discarded. In order to effectively implement any decision, it is important to have the entirety of team members on board. This is accomplished through consideration, “people’s belief that the leader actively listened to them during discussions and weighed their views carefully before reaching a decision.”

A lack of consideration often results in resentment and frustration from the individuals who feel like they have not been heard. Techniques for successfully giving consideration as a leader to all team members include:

  1. Convey openness to new ideas and willingness to accept differing views
  2. Avoid disclosing personal preferences early in the decision-making process
  3. Show active listening by making eye contact, asking questions, and echoing comments
  4. Take notes – shows effort to capture and understand people’s thoughts
  5. Explain logic behind final choice and why differing views were not chosen

Follow Through and Feedback

After constructive conflict and meaningful consideration, it is important for leaders to be intentional with follow-through and feedback. Too often, the performance review process that is used to address follow-through and feedback is empty and rushed.

To be effective, follow-through and feedback must be candid and continuous. Leaders should be open, honest, and decisive when providing feedback  and  should  give  constructive feedback  all  year long,  not  just  at  yearly performance reviews. Leaders must be willing to have the painful conversations. Avoiding giving honest feedback not only cheats individuals of their future growth potential but it also limits the organization.

Providing open and honest follow-through and feedback allows leaders to reward high performers, coach those who are struggling, and redirect counterproductive behavior. Leaders must not allow for individuals or the organization to settle for mediocrity.

The Result

“Diversity in counsel, unity in command”

– Cyrus the Great

When leaders model open, honest, and decisive dialogue, they promote constructive conflict, meaningful consideration, and honest feedback. The result not only produces a more thoughtful and decisive organization, but one that is engaged and energized as well. Creating a culture that promotes better decision making is the foundation to sound strategy and successful organizations.

Conclusion

The decision-making process is undoubtedly complicated. Even the soundest business models and the best managers can be plagued by bad decision making. The struggle with decision making is people’s inability to recognize flaws in their own thinking during the decision-making process. Often, it is only possible to recognize flaws after the decision-making process has been completed.

Organizations must recognize that an effective and efficient decision-making strategy is key to having a competitive advantage in any market. Organizations must first develop an understanding of where decision making goes wrong– because of bias at the individual and organizational level. Awareness, however, is just the first step. Once organizations understand the specific struggles they face with decision making, they must develop systematic approaches to combating these struggles.

Ultimately, however, the foundation of an organization that has an effective decision- making strategy lies in the ability of the leaders to create a culture of open, honest, and decisive dialogue.

HookedtoBooks.com would like to thank the Titans of Investing for allowing us to publish this content. Titans is a student organization founded by Britt Harris. Learn more about the organization and the man behind it by clicking either of these links.

Britt always taught us Titans that Wisdom is Cheap, and principal can find treasure troves of the good stuff in books. We hope only will also express their thanks to the Titans if the book review brought wisdom into their lives.

 

 

 

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