Decision-making lies at the heart of our personal and professional lives. Every day we make decisions. Some are small, domestic and innocuous. Others are more important; decisions that affect peoples’ lives, livelihoods and wellbeing. Inevitably, we make mistakes along the way. We are only human – even when we are at work. Indeed, the daunting reality is that enormously important decisions made by intelligent, responsible people with the best information and intentions sometimes go wrong.
Good leaders make bad decisions. Even great leaders can make bad decisions.
President Hoover failed to inflate the economy after the great crash of 1929. British Prime Minister Margaret Thatcher championed a “poll tax” that contributed to her being ousted by her own party. Paul Wolfowitz, the former U.S. Deputy Secretary of Defense, was asked to resign as President of the World Bank because of a pay settlement related to his partner who also worked at the bank.
And it's not just politicians and public servants who get it badly wrong; business leaders, too, are prone to misjudgment. Ken Lewis of Bank of America made a disastrous acquisition of Merrill Lynch. Juergen Schremp, CEO of Daimler Benz, led the merger of Chrysler and Daimler Benz against internal opposition. Nearly 10 years later, Daimler was forced to virtually give Chrysler away in a private equity deal. Kun-Hee Lee, CEO of Samsung, pushed his company into a disastrous investment in automobiles. As losses mounted, he was forced to sell the car division for a tenth of the billions he had invested. An Wang, founder of the electronics company Wang, insisted on a proprietary operating system for his company’s personal computer, even after it was clear that the IBM PC would become the industry standard.
The company is now history. Richard Fuld refused to accept the consequences of the worsening credit crisis and consider a sale of Lehman until it was too late. When he was ready, there were no buyers to be found. And CEO Jerry Yang insisted that his Yahoo! was worth much more than the market, or Microsoft, believed it to be. In the end, his stubborn refusal to consider Microsoft’s overture to buy the company cost shareholders $30 billion, and Jerry Yang his job.
Whether the decision is a personal one, as in the case of Wolfowitz, or of global importance, as in the case of the meltdown of the financial markets in 2008, mistakes happen. But, why do good leaders make bad decisions? And, how can we reduce the risk of it happening to us?
Flaws of the Jungle
We identified four conditions under which flawed thinking is most likely to happen. We call these “red flag conditions” because they provide a warning that, when these conditions exist, even an experienced decision maker may get it wrong.
Misleading experiences are memories that seem similar to the situation we are facing, but are not. They are most likely to disrupt our thinking as we assess the situation, either because we misrecognize the pattern or because the emotion tagged to the pattern gives us an unsuitable action orientation. For example, the high profits made from sub-prime lending and the success of CDO vehicles misled bankers across the world, causing them to take risks that now seem foolish.
Misleading pre-judgments are previous decisions or judgments that mislead current judgments. They are most likely to create distortions when we evaluate outcomes: they cause us to get committed to the wrong plans. In addition, they can cause us to fixate on a particular plan of action – often something that has worked in the past.
Inappropriate self-interests are personal interests that conflict with the responsibilities we have for other stakeholders. We routinely ask individuals to leave the meeting or refrain from voting if we know they have a personal interest at stake. In fact, much of the current financial crisis is being blamed on the lack of alignment of interests between highly paid bankers and a stable financial system.
Inappropriate attachments are strong emotional feelings we have towards a group, place, or possession, that are inappropriate given the decision we are trying to make. In the current climate, where many organizations need to cut back employment and sell assets, some “loyalties” will overrule rational downsizing decisions and some assets will be inappropriately retained because "the Chairman used to work in that business".
Each of these red flags can unbalance the mental processes of a decision maker. The leader will feel confident that he or she is making a wise choice, even though the thinking is flawed. As a result, when one or more red flags exist, leaders and their colleagues need to put in place some safeguards.
Safeguarding Against Bad Decisions
Safeguards reduce the risk that red flag conditions will lead to a bad decision: they act as a counterweight:
Experience, Data, and Analysis. One type of safeguard is to provide decision makers with new experiences or data and analysis. By doing so, the risk of a flawed decision can be reduced at the source. For example, during the Cuban Missile Crisis, Kennedy needed to know the number, location, and state of readiness of the missiles—so that he could better judge whether it was feasible to carry out a military strike and the time he had available before the Soviets would have a functioning and significant threat to U.S. security. So he had the air force carry out reconnaissance flights.
Group Debate and Challenge. Creating a debate that challenges biases need not involve an elaborate process. It could mean simply chatting through an issue with a friend or colleague. Even if the other person is not an expert, the process of debate can help expose assumptions and beliefs. In large organizations a typical way to orchestrate debate and challenge is to form a decision group. The size of the team may vary from two to many, although typically a few people are a better number for a debate. The choice of who should be on the team is vital in defining the quality of challenge that can take place. For example, a U.K. food company with several business divisions sometimes chooses a manager from a sister division to chair the decision group. The intention is to bring a challenging, and potentially more objective, perspective to the decision.
Sometimes an open debate is hard to generate or is not enough to challenge a powerful and strongly entrenched point of view. In this case, the governance team, which approves the proposal submitted by the decision team, may play the critical role. President Kennedy gave himself this role in the Cuban Missile Crisis. In the case of a major acquisition, the decision team might be the CEO and the CFO, and the governance team might be the board led by the chairman.
This is a normal part of almost every decision. What we are suggesting here is that, for some decisions, where there are red flag conditions that managers believe are hard to address with the first three categories of safeguard, then the last defense is to put in place some extra monitoring. The safeguard is the extra monitoring over and above what would have occurred anyway. In the case of the Cuban Missile Crisis, Kennedy could not be sure that he had made the right decision. He knew he had limited data about how the Russians would respond to his decision to blockade Cuba. As a result, he opened extra channels of communication with Khrushchev to monitor the impact of the blockade on his thinking. This gave Kennedy more information about the Russian leader’s reactions and helped him come up with the idea of trading the missiles in Turkey for those in Cuba.
At the heart of our analysis is the premise that leaders can make good decisions. But decisions don’t just happen by themselves, people make, or don’t make, decisions. That’s why it is so important to bring the focus back to the key people in organizations that we call leaders. We all share some common attributes because of how our brains have evolved, and these attributes have much to do with how we think and act. There are a lot of good things that come with this, but also some potentially dangerous things as well, so if we don’t take it upon ourselves to be alert to these red flags and think again, we are vulnerable to making bad decisions that we need not make.
Sydney Finkelstein (Ph.D. Columbia University) is the Steven Roth Professor of Management at the Tuck School of Business at Dartmouth. His research focuses on strategic leadership and corporate governance, and he has published 11 books and more than 65 articles on these topics. His most recent books are Think Again: Why Good Leaders Make Bad Decisions and How to Keep it from Happening to you (2009), and Strategic Leadership: Theory and Research on Executives, Top Management Teams, and Boards (2009). (Tuck School of Business, Dartmouth College, Hanover, NH 03755, USA. Tel.: +1 603 646 2864; fax: +1 603 646 1308; email: