Don’t Follow the Herd

by Peter Tingling

Making the right decisions has long been the hallmark of superior performance — and never more important than now. Indeed, good decision making is as equally relevant to developing a solution for the current economic crisis as it is to the NHL draft.
How we make decisions is not only the essence of management, but our ability to make good decisions is often the only difference between success and failure.

Although we know that decision making can be chaotic, opportunistic and intuitive, it is a rare and perhaps brave manager who does not apply formal and rational analysis when making decisions. The real message of Malcolm Gladwell’s Blink is not that intuition is useful in the detection of art forgeries, but that it is usually the result of years of judgment and largely inadequate for complex financial decisions. Smart managers do not use intuition as a replacement for analysis but as a complement to approaches based upon intelligence-design-choice where rationally analytic methods are used to assess alternatives.

Commonly taught in business schools, sophisticated models and advanced analytics such as Subjective Expected Utility, Value at Risk, Risk Adjusted Return on Capital and modern portfolio theory are the essential decision tools of most managers.

However, decision makers are not simply economic automatons or “lighting-fast calculators” who plug data into computers. Before committing to a course of action, managers frequently consider the decisions made by others and weigh how their own decisions will be perceived. Most particularly among heavily regulated industries or where signalling behaviour can be easily observed, decision makers have often been found to copy or mimic the decisions of others and create a herd of common choice even if the outcome is wrong. The adage that bankers make lemmings look like free thinkers has a great deal of currency in financial circles.

But how pervasive is this phenomenon and, perhaps more important, do managers knowingly make decisions that they believe to be against their own judgment? During a multi-year research project into decision making, I led a study to investigate these very questions. A national sample of hundreds of senior executives and managers were given an analysis of two options.

Decision makers have often been found to mimic the decisions of othersand asked to choose between them. Not surprisingly, the overwhelming majority, 91%, selected the one that traditional analysis indicated was the “better” choice. However, when informed that someone else had already selected the demonstrably inferior choice, the proportion of managers selecting the “better” option dropped to 73%. Furthermore, if told that the person who had selected the inferior choice had a reputation for high performance, the proportion of decision makers selecting the “better” option dropped to 63%.

There are a number of implications to this study. The first is that managers do not always do what we expect. When asked why 9% of the decision makers ignored the traditional analysis and selected what was clearly an inferior choice, the most common refrain was they thought that they would show some leadership by being different and that the two choices were so similar that the difference was negligible. This is of course very close to the operating world of most senior executives. As U. S. president John F. Kennedy noted during the Cuban missile crisis, at the point of executive decision the obviously poor options have usually been excluded from the array of choice and all of the alternatives have about the same degree of viability.