LEADERSHIP
On 11 March, UCD Smurfit School gathered together 18 of the thought leaders among its faculty to present new ideas that could be employed by participants to improve leadership effectiveness, innovation and growth strategies. We spoke to some of the contributors to the ExecutiveEdgeevent
The executive
How cognitive biases affect strategic decision-making
I
N his session Karan Sonpar drew attention to “the persist- ence and consequences of cognitive biases in the face of envi- ronmental turbulence, and escalating commitment to fail- ing courses of action”.He drew on examples from the recent banking crisis, as well as failures of previously successful companies, in order to identify strategic errors made by companies, and offer solutions to minimise them. He spoke to us about the project behind this presentation.
“We think human beings are rational and logical in their decision- making,” says Sonpar. “Yet, history is replete with examples of how what we call ‘cognitive biases’ can affect the quality and content of decision-making.” These ‘cognitive biases’, he says, can take the form of escalating com- mitment to failing courses of action, rigidity in the face of external threats, over-optimism, resistance to challenge assumptions, and hubris. He points to a recent Harvard Business Review article penned by
Professor Dan Ariely of Duke University. “Ariely goes as far as to argue that our cognitive and intellectual limitations imply that we are more like Homer Simpson than like Superman,” says Sonpar. To illustrate the point further Sonpar cites a large project on which
he is working with UCD’s Dr Federica Pazzaglia, on the Irish bank- ing crisis. “Our analysis of thousands of pages of annual reports, gov- ernment publications and newspaper articles over a 15-year period draws attention to the complementary role played by cognitive and behavioural biases in the onset, diffusion and resistance to change that were evidenced in the Irish banking crisis,” he explains. Sonpar and Pazzaglia are focusing particularly on where and why
26 UCD BUSINESS CONNECTIONS edge
things went wrong, and the pair have specifically supervised three MSc theses which further develop these ideas.
Architecture of simplicity In Dena Y Lawrence’s MSc thesis, entitled Introduction of a non- traditional and aggressive approach to banking (1995–2001), recently accepted for publication in the Journal of Business Ethics, Anglo Irish Bank is the subject for the case on how a small and peripheral bank was able to introduce such dramatic changes in the approach to banking. “This is a classic case of what Professor DannyMiller refers to as the ‘architecture of simplicity’,” explains Sonpar. “That is to say, in order to be successful, organisations will become increasingly simple and spe- cialised – in this case focused on lending to property developers. “Yet, simplicity and specialisation have a double-edge. The very
factors that make organisations successful will eventually bring them down due to excessive exposure and reliance on a product or service, and due to the escalation of commitment. “Another cognitive error that was evidenced in the early period was a heightened sense of faith and optimism in the principles of the free- market,” Sonpar continues. “And, finally, initial successes in Anglo Irish seemed to have created hubris (or overconfidence) in itsmanagers. “The take-home message? Success can create overconfidence and resistance to change. Be careful!” says Sonpar.
Herd mentality Next, he points toNancy Timm’s thesis, Diffusion of aggressive prac- tices (2000-2005), where ‘herding’ was identified as a classic cogni- tive error that occurs in organisations. “This is where you see organ- isations start to mimic practices of other organisations that have been successful, and adopt practices without fully evaluating them,” says Sonpar. “An example is increased risk-taking and aggressive bank lending to property developers. In the Irish case, it appears to have been a case of escalating commitment to these practices.
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