A leader’s guide to making better strategic decisions

Decision-making is a leadership skill

As a leader, you’re responsible for making the most important and difficult decisions in your organisation. You’re accountable for the outcomes of decisions you make as well as those made by people all across your organisation.

Decision-making is a crucial skill for leadership. Unfortunately, poor quality decisions are the norm in most organisations.

As a consultant, the most common issue I come across when working with leadership teams is the lack of discipline and structure around decision-making.

It isn’t a lack of decision-making that holds organisations back. Instead, it’s the absence of a decision-making process, poor time management and a complete lack of discipline in following up the decisions leaving the boardroom that keeps organisations from really flourishing.

All decisions aren’t created equal

We make a lot of decisions in a day.

According to some estimates, we make over 35’000 decisions each day!

how-many-decisions-we-make-at-work

According to OECD, people in developed countries spend an average of 36,82 hours at work per week. For an average person that adds up to 73 640 decisions a week.

This number includes everything from deciding to grab that third cup of coffee before lunch to asking your boss for a raise.

We make two types of decisions at work

  1. Strategic Decisions
  2. Everyday Decisions
two-types-of-decisions-manegers-make-at-work

The importance and impact of the decisions we make at work vary greatly. Every decision you make as a manager shouldn’t take the same mental effort. You’ll end up exhausted before noon if you spend the same amount of energy deciding on your lunch today as you do on deciding to buy a new office building.

Strategic decisions

Strategic decisions are the ones you make to improve growth, competitiveness and to ensure the overall survival of your business.

Such decisions often involve exhaustive analysis, discussions with stakeholders and significant commitment of organisational resources.

An everyday decision could be as simple as reallocating tasks within your team, whereas a strategic decision might require answering questions such as:

  • Who to hire?
  • Which projects to start?
  • Which tasks to prioritise?

Everyday decisions

These are the decisions you make every day to improve the efficiency or productivity of your daily work.

Such decisions usually involve some form of reorganisation or reallocation of existing resources and can be made without much analysis. Most organisations have clearly defined processes or Ways of Working to handle such decisions.

Strategic decisions set the pace for everyday decisions.

Are organisations generally good at making strategic decisions?

According to a McKinsey survey, 72% of senior executives believe that bad strategic decisions are “about as frequent as good ones or were the prevailing norm in their organization”.

How much do poor decisions really cost?

A McKinsey survey of 2,207 executives concluded that organisations utilising a systematic process for data analysis and decision-making saw a Return on Investment (ROI) of 6,9 percentage points on their investments.

good-quality-decisions-improve-ROI

The difference in ROI between the top performers and organisations lacking a systematic approach to decision-making was 5,3 percentage points.

Good analysis in the hands of a manager who has good judgement won’t naturally yield good decisions.

A cautionary tale of poor strategic decisions

Wells Fargo is a well-cited case for how poor performance management can lead to disastrous results.

But there’s more to the story than greed and mismanagement.

One explanation of what happened at Wells Fargo is a case study in how poorly formed strategic decisions cascade into hundreds and thousands of poor everyday decisions ultimately leading to loss and ruin.

According to an article in Harvard Business Review, among the many problems that lead to the now infamous scandal, one major cause was how the employees were incentivised and pressured to cross-sell products to existing customers.

Both cross-selling and sales incentives are the most commonly used performance management tools at most organisations.

What was so different here?

In my opinion, one culprit was their sales strategy built around the CEO’s mantra of ‘Eigh is great’ – meaning selling a minimum of eight products per customer.

This was a slippery slope into a permissive culture of underhanded sales practices and fraud.

How you can make better strategic decisions

There are three main components of decision making:

  1. People
  2. Processes
  3. Principles
three-ingredients-of-a-good-decision

People

We’re both empowered and held-back by our cognitive biases. Our biases can cloud our judgement and bypass objective and logical thinking without us even realising it!

The Two Systems

Daniel Kahneman and Amos Tversky, through their research in cognitive psychology and behavioural economics, identified two modes of thought; a faster more instinctive and emotional mode as well as a slower more deliberate and logical one.

System 1: Thinking Slow

System 1 is the more intuitive way of thinking lead by our emotions, feelings, intentions and impressions. This system is always ready to jump into action and help us do things we’re familiar with as effortlessly as possible.

System 2: Thinking Fast

The more deliberate way of thinking, System 2, is lead by logic and effortful thinking. This is the system that kicks in when the stakes are high and deliberate reasoning is required.

Most of the time, System 1 dictates our thoughts and actions – this is also where our biases live.

What is cognitive bias?

A cognitive bias is a type of error in thinking that affects our decision-making and judgement.

congnitive-biases-cloud-judgement-in-decisions-making

No one is free of cognitive biases because it’s an evolutionary mechanism designed to help us be selective in how and where we invest our limited thinking capacity. 

Cognitive biases commonly related to memory (how we remember events) and attention (what we pay attention to) regularly influence our judgement.

9 Biases that Affect Decision-Making

So far psychologists have discovered 104 different biases. In this article, I will explore 9 major cognitive biases that researchers have found to have the strongest effect on decision making.

1. Confirmation bias

“I’ve known him for many years, he would never lie!”

We tend to listen more often to information that confirms what we already believe.

Confirmation bias involves favouring information that confirms our previously existing beliefs or biases and it can lead us to disregard any new information that contradicts our long-held beliefs. 

It leads us to seek, prefer and even recall information in a way that confirms our pre-existing beliefs – despite evidence to the contrary.

We may seek out “proof” that further supports our belief while discounting examples that contradict it. We even interpret new information in a way that is favourable to us and remember details in a way that supports our views and reinforces our attitudes.

When two people from opposing sides of an issue hear the same story but walk away with wildly different interpretations – each feeling that it validates their own existing point of view, it’s often indicative of confirmation bias in action.

2. Anchoring bias

“That second offer is so much cheaper, I don’t think it can be as good.”

We tend to be overly influenced by the first piece of information that we hear or see, a phenomenon known as the anchoring bias or anchoring effect.

If you first see a bottle of wine that costs $450 and then a bottle that costs $100, you’ll be prone to see that second bottle as cheap. If you first see a $100 bottle and then a $450 bottle of wine, you’ll be prone to consider the second one as very expensive or overpriced.

Anchoring bias happens when we put too much value on the information we already have or first receive when making new decisions. 

Anchoring leads us to question the quality of a product from an unfamiliar brand compared to a product with similar features from a well-known or familiar brand.

Over-reliance on what we already know without seeking and evaluating new information often leads to poor decisions.

3. Loss Aversion

“I have to buy something because the sale ends today! After today I won’t get the 20% off anymore.”

Loss always looms larger than gain. Human psychology hates seeing loss and the psychological pain of losing something is 2 times stronger than the pleasure of gaining something else of equal value.

Losing $100 is emotionally more impactful than gaining $100. If you have $100,000 but lose 20%, you will be very unhappy. But if you have nothing, $0, and gain $20, you will simply be happy. Out of these two, the story you’ll be telling in the future is the one where you lost.

Free-trials are a great example of how loss aversion is frequently used in marketing.

Loss aversion is a strong motivator that can lead us to purchase software that we started using on a free-trial.

Once you have gotten used to a product or service, you become more willing to pay in order to avoid losing it. If your grocery store has been offering free home deliveries for three months, you’re more likely to begin paying them for the service to keep it going.

4. Affect Heuristic

“This place serves seafood. I had seafood once and it was horrible, I’d rather not eat at a place that serves seafood.”

Any time you’ve gone with your gut feeling, you’ve experienced the affect heuristic. It is a mental shortcut we use when making automatic decisions and it relies heavily on our emotional state during the decision-making rather than proper consideration of the long-term consequences.

The affect heuristic is involuntary and quite powerful. The immediate emotional response to a stimulus will drastically change how we interpret later events and choose to act.

When evaluating something we like, we tend to exaggerate the benefits and downplay any risks and do the opposite for things we dislike.

For example, a person who owns a dog will view an unfamiliar dog differently than a person who was bitten by a dog as a child. (“Oh, it’s just a friendly dog, dogs are nice!” vs. “Dogs are dangerous because they can bite you.”)

Once you’ve had a bad experience with a dog, you’re more likely to think less of all dogs.

Decisions made under the affect heuristic bias are heavily influenced by our emotions and how we feel about something.

5. Sunk cost fallacy

“We haven’t gotten the kind of results we’re looking for because we need to invest more resources into this project.”

We are committing this fallacy when we justify future investments based on unrelated previous costs. 

Imagine you made plans with a friend to see their favourite (but not your favourite) band play live. You also paid $50 for your ticket. Your friend had promised to drive you but on the day of the concert, she gets sick.

If you decide to spend $100 for a taxi to take you to the concert, simply because you’ve already spent $50 on the ticket, then you’re spending more money just to make up for a sunk cost.

6. Salience bias

“I see ads of that lawyer on every busbench I pass, he must be a very good lawyer.”

Believing that something or someone is important simply because of their prominence is salience bias.

Often Call-to-Action buttons are designed to be easily accessible and made to stand out using bright or contrasting colours.

By making something, e.g. a CTA button, more salient we can improve the likelihood of people paying attention to it and eventually interacting with it.

7. Availability bias

“I saw on the news there had been a lot of car thefts in our neighbourhood, crime is on the rise here!”

When making decisions about risk or reward we overemphasise information we can easily recall. The availability bias is essentially a mental shortcut designed to save us time when we are trying to determine risk.

An unfortunate event such as a plane crash gets more coverage than most car accidents. This often leads people to closely associate air travel with accidents and consider driving a safer option by comparison.

Statistics prove that more people are injured in every day road accidents per year than in air travel. But availability bias can lead you to false conclusions.

8. Planning fallacy

“This is a piece of cake and won’t take more than an hour to complete.”

When planning for the future we tend to underestimate the time, cost and risk of a task or project.

It’s commonly believed that projects both large and small often miss deadlines and go over budget. Yet most project plans are overly optimistic.

We overestimate the likelihood that good things will happen to us while underestimating the probability that negative events will impact our performance.

A well-known example of this is the construction of the Sydney Opera House. Planned to be completed in 1963 for 7 million dollars, it was actually completed in 1973 for a total cost of 102 million dollars.

9. Probability neglect

“I snowboard all the time and nobody ever gets seriously hurt. But I hear horsebackriding is really dangerous!”

Believing that activities that we’re commonly involved in are less risky than uncommon ones.

For most amateur swimmers the prospect of going for a swim in a pool seems a lot safer than going for a swim in the sea.

Both environments come with their own inherent risks and rewards that should be objectively evaluated. Our familiarity with the environment or activity can often lead us to a false sense of security.

Cognitive biases & collective decision-making

As individuals, we generally accept the decisions we make on face value alone because they are based on our intuition or experience.

Simply knowing that our decisions are biased doesn’t help us recognise when we’re taking these psychological shortcuts to decision making.

In organisations where decisions are often made by groups of people, the collective impact of cognitive biases of the people involved in decision making can lead to a number of new challenges.

Groupthink

Groupthink occurs when rational and independent members of a group strive to get a consensus in order to maximise harmony and conformity as opposed to argue and debate possible alternatives, risks and rewards.

Decisions made under groupthink are often done without proper critical thinking and evaluation of possible alternatives.

The halo effect

The halo effect is an error in judgement where the positive qualities or benefits of a decision form the basis for a belief that the same decision will be successful in a different scenario.

A previous successful decision can lead a team to believe that they can be just as successful in a completely different scenario without proper analysis.

Since everyone’s biased in one way or another, what we need are processes to help us recognise and mitigate their effect and minimise their negative impact on decision-making.

Processes

The second ingredient of effective decision-making is having a process for identifying biases and mitigating them both as individual decision-makers and as a team.

Benefits of having a process for decision-making

There are three major benefits to having a systematic process for decision-making. Obviously, being able to actively recognise biases and mitigate their impact is one but beyond that is can also drastically improve the quality of decision-making.

The three main benefits to decision-making:

  1. Identify biases most likely to affect decision-making.
  2. Establish practices and tools for countering the effect of biases.
  3. Nurture a culture where a disciplined process, not individual-genius, is rewarded.

Symptoms of poor organisational decision-making

Authors of the book Think Again: Why Good Leaders Make Bad Decisions and How to Keep it From Happening to You, recommend looking out for the following red flags under which decision-making is most likely flawed.

Misleading experiences

Executives and other decision-makers in your organisation do not recognise their lack of experience or knowledge or take steps to minimise the gap – especially when dealing with unfamiliar situations.

Misleading prejudgements

Executives and other decision-makers in your organisation overemphasise past experiences and knowledge even when approaching unfamiliar situations.

Inappropriate self-interest

Self-interest can be a big motivator. However, in the absence of a process to recognise, address and properly manage rewards and expectations, it can lead to poor judgement.

Inappropriate attachments

Beyond self-interest, objective analysis can be clouded when people feel the need to protect their own interest or that of others’ they feel closely attached to.

How to start making better strategic decisions with your team

Reviewing recommendations made by others and deciding to accept or reject them is the most common type of decisions executives make.

While it can often be challenging to recognise one’s own biases, you can improve the decision-making process by applying rational thinking and reasoning (your System 2) to identify errors in judgement in others.

This is where a systematic process for decision-making and analysis comes in handy.

Decision quality Framework

Decision quality (DQ) is a framework of processes and tools that aid in making high-quality decisions that capture the most value or get you to the best outcome amidst uncertainty.

decision-quality-framework

Step 1: Frame the problem

The first step to effective decision-making is a correctly framed problem. Take the time to understand what problem is being solved, then assigning the right people to work on the right problems the right way.

Get the first step right by aligning on the purpose, perspective and scope of the problem being solved.

Step 2: Consider alternatives

A solution is only as good as the alternatives considered in the decision-making process.

Before deciding on any one solution, discover and debate every best alternative way to solve the problem.

Step 3: Gather meaningful data

The quality of a decision is only as good as your understanding of the problem you’re solving. Gather all relevant data and make sure that you’re aware of the gaps in your knowledge.

Being aware of what information you have and what information you lack is crucial for addressing uncertainties, biases and dependencies.

Step 4: Clarify values & trade-offs

Recognise the requirements of everyone affected by the decision. Evaluate possible trade-offs and avoid compromising on the ultimate objective.

Step 5: Encourage reasoning & debate

Fastidiousness, not consensus, is the hallmark of a good decision. Encourage reasoning and debate and, where possible, use decision analysis tools to arrive at the best choice.

Step 6: Commitment to action

The Achilles heel of any decision is the failure to execute it properly. The outcome of a successful decision-making process is a decision that can be implemented.

Performance management tools such as OKRs can aid with translating decisions into action.

The fundamental purpose of DQ framework is to improve the effectiveness and efficiency of the problem-solving process.

A decision quality framework doesn’t guarantee better decisions, instead, it’s a process that allows you to focus on measuring and improving the quality of a decision while it’s being made.

Over time, you can improve the quality of the decisions your organisation makes by comparing the quality of your decision-making process against the outcomes.

Decision quality control

DQ is an excellent tool to use when you’re actively involved in the decision-making process.

But what if you’re an executive responsible for signing off on the recommendations made by your team?

This is where you can use the decision quality Control checklist.

A DQ checklist is a tool for decision-makers. Based on 12 questions, it’s designed to unearth the cognitive biases of the teams making recommendations.

Note: Since we’re often unable to recognise our own biases, the developers of this tool, Daniel Kahneman, Dan Lovallo and Olivier Sibony caution that executives using this checklist should be completely independent of the team making the recommendations.

1. Is there any reason to suspect errors driven by the self-interest of the recommending team?

It’s recommended never to ask this question directly.

Since the preference for certain outcomes is present in every recommendation, executives should look out for minimising the risk of such errors. (See confirmation bias & loss aversion earlier in the article.)

2. Have the decision-making team fallen in love with their recommendation?

Watch out for: affect heuristic.

Often people making the recommendations can be driven by a strong passion for the project or the outcome. Executives should ask to see objective and relevant data when making a decision.

3. Did anyone in the team making the recommendation disagree with the team’s proposal?

Watch out for: groupthink.

Often teams making the recommendation present a unanimous front. The executive should unearth if there were any opposing views within the group and whether those views were objectively analysed.

4. Is there a chance that the recommending team over-emphasised a past success in making their proposal?

Watch our for: salience bias.

Executives who suspect that the team has been overly influenced by past success in making their recommendation should ask the team to explore alternative options.

5. Has the team objectively evaluated all credible alternatives?

A good decision-making process isn’t complete unless the best alternatives have been evaluated.

Executives should ask the recommending team to submit 2-3 alternative proposals, complete with equally objective and fact-based analysis.

6. Do you know the source of data used to create projections?

Watch our for: anchoring bias.

Projections delivered by a team can be anchored to an inaccurate value or estimate.

Executives should help the team reevaluate their estimates by asking them to create new projections after re-anchoring to a different value.

7. Have you been informed of all known gaps in the information required to make this decision?

We often fall victim to believing WYSIATI – what you see is all there is. Executives should seek details on both the availability and gaps in data and knowledge required to make a good decision.

8. Can you detect the halo effect?

The halo effect happens when the successes and failures of a project are attributed to personalities of the people leading them.

Executives should ask for other comparisons if the current benchmarks seem to overvalue a specific person, product or a brand.

9. Do the recommendations overvalue certain past decisions?

Watch out for: sunk cost fallacy.

Loss aversion is a powerful motivator.

Executives should be cautious if the recommendations point towards saving or revitalising an existing project that has failed to meet its performance targets.

Remember to separate past investments when they don’t affect future costs or revenues.

10. Is the worst-case scenario bad enough?

Project teams are often asked to deliver best- and worst-case scenarios. When the worst-case scenario isn’t really all that bad, executives can improve risk assessment and mitigation by asking the team to deliver a ‘premortem’.

A premortem is an exercise in which the team has to pretend that the worst scenario has already taken place and then back-track their steps to describe how and why it came to pass.

11. Is the primary hypothesis overly optimistic or simplistic?

Watch our for: planning fallacy.

Organisations often fall victim to seeing the world from their own and largely limited perspective, often overlooking the impact of external forces e.g. competitors and new technologies.

Executives should ask the team to deliver a benchmark with other similar projects outside their organisation.

12. Is the proposed plan ambitious enough?

Watch out for: loss aversion.

The flip-side of not being cautious enough is becoming too cautious.

Executives can help the team feel more confident and reassured by taking personal ownership of the project or by sharing the responsibility of the risk.

Principles

Beyond learning to recognise cognitive biases that cloud your judgement, and having the tools for making good decisions as a team. The final step for a leader is to take the principles of good decision-making out of the boardroom and into the whole organisation.

The role of culture in decision-making

So far, I’ve explored tools and strategies for improving the quality of decisions made by a select group of people, often senior managers or executives.

But as any seasoned leader would tell you, real success stems from building a culture in which making good decisions becomes the norm at every level of the organisation.

How to build a culture for smarter decision-making

Stephen R. Covey described principles as rules that are universal and unchanging. Whereas values, in his view, both personal or organisational are subjective and change over time.

The value & purpose of principles

In decision-making, principles are the structure for how decisions are made and values determine what types of decisions are necessary.

Overtime your values and priorities will change but your principles will ensure the quality and consistency in decision-making.

Principle #1

Create and adhere to a set of clear and explicit ‘philosophical beliefs’ that guide decision-making across your organisation.

The first principle comes from the COO of Stripe.

Communication and alignment on core values and principles are simpler when decisions are made by a small or select group of people.

As more people become responsible for decision-making, organisations need to document the rules and frameworks that are used to guide decision making.

Making these tenants well documented and easily accessible to both existing and new people in your organisation ensures that all decisions, even when made under different circumstances, follow the same basic principles.

Find the complete list of Stripes ‘Philosophical Beliefs’ here

Principle #2

Ensure the psychological safety of the people affected by the decision. This is what ultimately separates a decision that’s successfully executed from one that isn’t.

A decision alone, even when made following a good process, doesn’t automatically ensure a commitment from the people who are going to make it happen.

Ensuring psychological safety i.e. addressing people’s’ fears and anxieties, by listening to their thoughts and opinions, is an important and mostly overlooked step in the decision-making process.

Principle #3

Build transparency and accountability in your decision-making process.

You’re not truly responsible unless you have the authority to make necessary decisions related to your job.

And you can’t be truly effective at wielding authority unless you’re held accountable for your decisions.

This is the golden rule for effective decision-making involving multiple people or teams.

RACI-Model is a simple method that can be used to integrate this principle into your decision-making process. 

Transparency and accountability take the ambiguity out of the decision-making process. 

Here’s an example of the RACI-Model applied to Starwars.

Principle #4

Reaching consensus isn’t a hallmark of a good decision.

It’s a folly to consider compromise and consensus as an important milestone in the decision-making process.

More important than reaching a compromise is ensuring that everyone is heard, the process is transparent and fair and that the right person is given the responsibility to make the final decision.

Principle #5

Most decisions have an expiration date: set yours and stick to it.

Some decisions have dire consequences if you get them wrong. These are the decisions that typically take time to make and are not reversible like many other decisions.

Spending the same amount of time and resources on every decision can quickly turn into a massive overhead.

At the start of every decision-making process, clarify how much time and effort will be invested in making the decision.

Doing this right at the beginning forces you to evaluate the inherent value of the decision to your organisation.

After this, deciding who needs to be involved in the process, and what their roles and responsibilities are, becomes a lot simpler.

TL’DR

Managers need to make tactical or every day decisions as well as long-term or strategic decisions. How a decision is made is just as important as what decisions are made.

Decisions made through a systematic process involving data analysis result in higher ROI.

Three ingredients of good decision-making are 1) People, 2) Process and 3) Principles.

You can learn to recognise the most common biases that affect judgement but you will still need a systematic process to mitigate their effect on decision-making.

Beyond the tools available for improving personal and organisational decision-making, a cultural shift is necessary to improve the quality of everyday decisions.

Incorporating tried and tested principles are essential for building a lasting culture of good decision-making.

Further reading

Decision Quality Defined – https://sdg.com/thought-leadership/decision-quality-defined/

Decision Quality – http://www.decisionframeworks.com/decision-quality/

An Organisation-Wide Approach to Good Decision making – https://hbr.org/2015/05/an-organization-wide-approach-to-good-decision-making

The Big Idea: Before you make that big decision… – https://pdfs.semanticscholar.org/0671/f17e1cc2ab16c719974b2c2c145a54a28764.pdf

Think again – How good leaders can avoid bad decisions – Think Again. Why Good Leaders Make Bad Decisions and How to Keep It From Happening to You

The case for behavioural strategy – https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-case-for-behavioral-strategy

How we do it – Three executives reflect on strategic decision making – https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-we-do-it-three-executives-reflect-on-strategic-decision-making

The 6 Decision Making Frameworks that Help Start-up Leaders Tackle Tough Calls – https://firstround.com/review/the-6-decision-making-frameworks-that-help-startup-leaders-tackle-tough-calls/

How many decisions do we make each day – https://www.psychologytoday.com/us/blog/stretching-theory/201809/how-many-decisions-do-we-make-each-day

Cognitive Bias – https://en.wikipedia.org/wiki/Cognitive_bias

The Affect Heuristic and Decision Making – https://www.verywellmind.com/what-is-the-affect-heuristic-2795028

Decision Quality – https://en.wikipedia.org/wiki/Halo_effect#Marketing

Salience Bias – https://thedecisionlab.com/biases/salience-bias

The 7 Habits of Highly Effective People, Stephen R. Covey, Publisher: Free Press

Decision Quality: Value Creation from Better Business Decisions, Spetzler, Winter, Meyer, Publisher: Wiley

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