Much Ado About Cognitive Biases

I'm seeing "cognitive biases" everywhere I look! Three times today I've come across the phrase, outside of the strictly business press. From: 

• The Atlantic, December 2011: "The Myth of Objectivity." An essay about how our political leanings are tied to our m-i-s-conceptions about economics -- and how myside bias, the tendency to judge a statement according to how conveniently it fits with one's settled position, factors in. 
• A recent novel by David Brooks entitled The Social Animal. Chapter eleven outlines some of the work being done in the cognitive bias sphere by behavioral economists and others. Their research is linked specifically to management consulting later in the book. 
• Edge Perspectives with John Hagel: "Cognitive Biases in Times of Uncertainty." A blog posting about our tendency to focus on things that could go wrong in times of uncertainty. (wherein he cautions that this loss aversion bias of ours can lead us "down a path that we tread at our peril") 

You know what these rascals are. Scientifically, cognitive biases are "systematic tendencies to deviate from rational calculations." Unscientifically, they're inclinations or predilections. Mindsets. Or: the ways in which we're wired.

Biases live in our unconscious minds. That makes 'em Freudian features, I suppose, in the sense that they're mostly hidden from view, but they're not weird, neurotic, or pathological per se. To the contrary, it's normal to perceive the world in biased ways. I'm Okay, You're Okay. We're all biased. Everywhere and all of the time our biases are with us.

Even at work.

And that -- along with the fact that they can be pretty darn impregnable -- has important implications for business.

YOUR BOSSES' BIASES

No matter where we are, it's never easy in the moment to clearly see our own biases. I'd be willing to bet, though, you've had no trouble over the years spotting your bosses'. Think for just a second: Are you able to recall a former boss whose predictable ways, or consistent cluelessness, maybe, caused you to mutter under your breath? make a beeline for the break room? march on over to Monster.com? I don't think there's any getting around it...

If you've cared about what your company's doing and where it's heading, if you've been awake and alert at the wheel, then you've seen your fair share of poorly conceived plans, over-budget projects, unsuccessful reorganizations and [insert your favorite failed initiative here]. You've probably also attributed one or more of those to one or more of your bosses and their dubious thought processes. Rightly so.

It's only to be expected. (Isn't it by now?) Bosses are human. When you mix biased bosses with biased non-bosses you end up with biased companies. Companies with room to improve.

FOR CONSULTANTS: A NEW "IN"

That such companies exist is great for consultants. They provide an opening, in that such companies gotta act. Consultants can help them act better by making them smarter.

How do consultants make clients smarter?

By helping them make better sense of their business realities. Traditionally, the emphasis has been on providing them with effective ways of identifying things like structural differences (pertaining to costs, customers and competition) and capabilities (internal ones) -- the expectation being that clients would use those to glean intelligence, i.e., input, with which to inform and guide their later actions, i.e., output.

Makes sense to me, but, as we've come to find out, it's not an air tight or fool proof formula.

That's because between input and output there are decisions to be made. And, the deciding itself matters. Poor decision making leads to poor decisions. Research by the likes of McKinsey and Bain bears it out. It's also helped kick-start what looks and feels like a new movement: Some consultants are now helping their clients get smarter by homing in on the decision stage, too.

This new thrust is 100% about quality. Poor decision making lets garbage in. Good, i.e., high quality, decision making ensures that what goes in is the best it can be. The new value proposition logic says: Best-possible input thanks to best-possible decisions...should lead to best-possible output...which should lead to best-possible results for clients. Therefore, it's reasonable for consultants to expect to be rewarded for boosting decision effectiveness.

CHALLENGES

What makes for poor decision making is a lack of objectivity. The culprit? Cognitive biases. But getting rid of them or, more realistically, countering them -- well, that's easier said than done. Among the challenges: How do you even talk about such an esoteric subject? How do you go about developing tools and processes effective enough to counter real biases in real business situations?

I should say tons of good work has already been done on both fronts. For example, thanks to Dan Lovallo (a McKinsey adviser) and Olivier Sibony (a director in that company's Brussels office) not only do we now have a scientific definition of cognitive biases, we also have, with the publication last year of "The Case For Behavioral Strategy," a nifty bias typology for identifying them.

The Atlantic essay I cited deals with myside bias. Messrs. Lovallo and Sibony use "confirmation bias" to mean the same thing: the overweighting of evidence consistent with a favored belief, underweighting of evidence against a favored belief, or failure to search impartially for evidence. A confirmation bias, in turn, is a kind of pattern recognition bias. (As it turns out, we humans are really, really good at recognizing patterns -- even where they ain't.*)

Being able to communicate about biases is just a start. In order to combat their own, in-house biases, companies (i.e., clients) need weapons in the form of tools and processes.

For those consultants taking the lead in developing them, the work revolves around the idea that a decision, and the quality of it, is dependent upon three (3) factors: data gathering + judgments + a process for marrying the two. The more thoroughly each one of these is de-biased, the better the resultant decision. Individual consulting assignments then entail: 

• working side-by-side with clients on a key decision, sniffing out sources of biases as they relate to the three factors; 
• selecting practices and tools to minimize the most relevant biases; 
• making those (practices and tools) that work a routine part of the way the client makes all key decisions. 

That's a pretty zoomed out view. Zoom in, on the other hand, and you see challenges, experiments, wins, losses -- a scene that seems generally to be "bursting with enterprise and energy like a hive of bees." (Wm. Gass)

OPPORTUNITIES

The suggestion that decision making should and could become a point of emphasis in companies isn't new. Ram Charan and Larry Bossidy were talking a decade ago about "relentlessly confronting reality" and methodically rooting out biases.

McKinsey and Bain have done a lot of the heaviest lifting since then. Both still seem to be going full steam ahead. I know of other consultancies that are actively involved, but I don't know that this has become a mainstream offering. (Is your firm targeting decisions? If so, I'd love to hear from you.) My impression is that opportunities are plentiful.

Personally, I find the whole thing fascinating. Maybe even ingenious, the idea that a company's improved decision making could become, in effect, a driving force for growth. I can envision decision-centered approaches working wonders. At the same time, though, I still leave room for the converse; for the possibility that they could sizzle...fizzle...and flop.

How come?

We're not talking about simple systems here. We're not talking about machines. A certain pattern recognition bias of my own reminds me, always, to curb my enthusiasm. When it comes to we humans, and to systems (e.g., companies) that we comprise, let's just say...we're full of surprises. Famously so.

Can't wait to see how it all plays out.

*Confirmation biases are one of five types of pattern recognition biases the authors often see in business situations. The other four they call: Management by example, False analogies, Power of storytelling, and Champion bias. Click here for their full McKinsey Quarterly article.

WB's Way: A Certain Kind Of Modesty

The way of ignorance, therefore, is to be careful, to know the limits and the efficacy of our knowledge. It is to be humble and to work on an appropriate scale.

How are we ever going to make our collective way toward healthier communities? Wendell Berry’s been suggesting for years it has to start with personal decency, humility and cautiousness, a disposition he’s referred to as the way of ignorance. (a phrase borrowed from T.S. Eliot’s poem, East Coker)

I’m interested – for purposes of this short series – in what happens when the way of ignorance meets and conducts business. How do people and companies live up to its requirements in the real world? What kinds of results do they get when they do? Mr. Berry’s done more than his share to frame questions and provide answers, but I think more work is needed still.

Specifically, I’d like to try to link his ideas to the MANAGEMENT ADVISEMENT arena. And I’ve been keepin’ a sharp eye out lately for anyone or anything that might help.

Enter stage right: David Brooks and his new book, The Social Animal.

Enter, too, the concept of epistemological modesty. 

Epistemological What?

Might as well let him explain:

Epistemology is the study of how we know what we know. Epistemological modesty is the knowledge of how little we know and can know.

More user-friendly:

Epistemological modesty is an attitude toward life. This attitude is built on the awareness that we don’t know ourselves. Most of what we think and believe is unavailable to conscious review. We are our own deepest mystery.

Epistemological modesty is just like the way of ignorance.

If our ability to understand our selves is limited, so, also, by extension, must be our ability to understand other people, circumstances, and events. We still have to make decisions and take actions, of course. So the question becomes, How do we do so modestly? Mr. Brooks submits that we “can design habits, arrangements, and procedures that partially compensate for the limits on our knowledge.” In one of my favorite parts of the book, he then takes his best shot at illustrating what he means.

What really set my eyes a poppin’, though, were the parts in which he relates epistemological modesty to business management. This he does c-o-n-s-p-i-c-u-o-u-s-l-y via the characters (this is a fictional work) of Harrison, a “typical” management consultant* who DOES NOT exhibit epistemological modesty, and Raymond, a mid-level manager, who DOES. The narrator goes to great lengths to describe their respective decision making processes and the effects their decisions have on their companies.

It’s here where Mr. Brooks does just the kind of linking I alluded to before, and where he fills in some of the missing pieces. I don’t know what kind of impact this has had inside the consulting community, but I’m curious to find out.

I also want to find out if there are any real, living, breathing consultants who are talking this same sort of talk.

Philip Evans of the Boston Consulting Group is referred to in The Lords of Strategy (Walter Kiechel, III, 2010) as one who likes to think and talk about epistemology, specifically the nature of the knowledge of how to achieve competitive advantage. But, as for the modesty part?

BCG’s bailiwick has been strategic analysis and strategy formulation, along with the mission, vision, and values stuff that precedes it. In conversations about these topics with clients, what characteristic attitude does he bring? I’m sure all BCG consultations address enterprise risk management (ERM), but is that the same thing DB and/or WB have in mind?

"The Full Wendell" would call for companies to carefully consider, among many other things, the ramifications of the use of their products or services in the world. (Do they help end users become more self-sufficient? Do they promote wasteful consumption? Are they instrumental in helping people maintain and enhance their home towns?) Has any consultant at BCG, itself a US$ 3.05 billion firm, ever gone so far as to recommend to a client that the scope of her company’s operations should be limited, because, for example, further growth could be destructive?

These things I don’t know.

As always, more investigation is needed.

*Can you believe it, a management consultant in a novel?!?