Cognitive Biases and Management Decision Making –part 1

During a performance appraisal session, one of the managers in the room was promoting his employee. This individual employee had completed his most recent assignment before the deadline and to the liking of the customer. The person certainly deserved credit and most in the room, rated him high. However, no one ever questioned whether the employee was a consistent high performer over past one year.
Most managers, being as human we are, ( some may debate that about his/her direct supervisor) are prone to such behavioural biases. In the earlier paragraph, the entire term suffered from what we call as “recency bias”. We get carried away by more recent events during our decision making process.

In this discussion, which I intend to write as a short series of articles, I would like to touch upon few of such behavioural biases and how they impact managerial decision making. So let us get going.

We tend to hold on to our losses for too long and cash our gains very quickly. Why not cut our losses quickly ? We believe that the loss making propositions will magically become profitable one fine morning!! You have probably experienced it… while debating whether to sell when the stock market tanks and goes for a nose dive. Is it the same reason why managers hold on to projects that are not going anywhere? They continue to invest company’s resources in projects which yield nothing until they are forced to shut them down. Such “loss aversion” or “escalation of commitment” could be completely avoided only if we did not suffer from such inherent biases as humans.

Let us shift gears and discuss about delivering bad news to our people. How would you communicate layoff decision for a large group ? Do you do it in one go or tend to deliver small doses of it hoping to ease the pain? Imagine the nurse slowly pulling out the bandage from a dressed wound. Thankfully they pull it off in one go. The rapid pull triggers a sharp spike of pain. But isn’t making it a slow process more painful? We tend to often pull the bandage slowly by spreading the layoff over multiple months or quarters. I am not arguing against cases where you may want few people to stay for some time for an ongoing project!! Often management inflicting such pain to the organization over long period results in a sick organization with low motivation and energy.
In the next part, we will look at influences of biases such as “halo effect” and “framing”.

Meanwhile let us continue with our effort to behave both human and rational beings….

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