We’re all rational decision makers? Think again.

We say we make decisions based on an assumption of a rationality that maximizes. In reality, we are imperfectly rational creatures who make sub-optimal decisions. Time to re-visit our assumptions.

The model of rational choice makes several assumptions. It assumes that our goal is to maximize self interest. It assumes that different dimensions of our decisions are “commensurable” (that is, comparable on a common scale—say a “utility” scale). And it assumes that we act with complete information and can meaningfully assign probabilities to every outcome. (…)

What modern research tells us is that we are imperfectly rational in two different respects.

  • One is that we do the “math” wrong; we are bad at thinking about uncertainty and at creating relevant and accurate spreadsheets in our heads.
  • The second is more important: we often want the wrong things.

We mispredict how much satisfaction, or utility, a given outcome will give us. We discount future consequences of decisions too steeply (and thus eat and spend too much, and exercise and save too little). And we mispredict how long a given decision will satisfy us. That is, we tend to ignore the fact that we get used to good things so that they provide us with satisfaction for a much shorter time than we imagine.

The model [of rational choice] is not fine. Virtually all of the assumptions built into it about human beings and the world are false:

It assumes that people are self-interested. Well, yes and no. Self-interest is certainly part of what moves us, but we are also interested in the welfare of others (…), and even the world. And we are also interested in doing what’s right (…).

It assumes that there is a common scale of value on which everything can be compared. There isn’t. Sure, we can assign value numbers to things like salary, colleagues, being close to our families, and the like, but in doing so, we are only kidding ourselves that these numbers actually represent a common underlying metric. Tradeoffs are hard to make, and often can’t be made formulaically. (…).

It assumes that we can attach meaningful probabilities to outcomes. Sometimes we can, but life is not a roulette wheel or a series of coin flips, in which probabilities are well defined. The world is a radically uncertain place, and we deceive ourselves if we think we can always attach numbers to our uncertainty.

via Barry Schwartz.

Holding a meeting of people from different cultures

In one of the People and Business Management workshops that I facilitate we ask participants to outline how they would approach their first meeting as the manager of a multicultural team. I’m always pleasantly surprised by the imagination and inclusiveness of the responses.

This article in the Harvard Business Review provides useful guidance. Here’s an excerpt:

Do

  • Study up on the variations that exist among cultures and how those differences play out in the workplace
  • Create protocols and establish norms so that your colleagues understand how meetings will run
  • Incentivize colleagues to step outside their cultural comfort zones by institutionalizing rewards around what you’re trying to motivate people to do

Don’t

  • Be hung up on how people from certain cultures are supposed to act—remember, people are capable of adapting and adjusting their cultural default
  • Force a perfect dynamic in meetings—solicit colleagues’ opinions in other venues and encourage people to provide feedback in different ways
  • Overlook the importance of team bonding—encourage colleagues to get to know each other outside of meetings so that cultural differences won’t seem as glaring

 

Mintzberg: time to think of organizations as communities of cooperation

Our obsession with leadership, of any kind, causes us to build organisations that are utterly dependent on individual initiative. We do not allow them to function as communities. So when they fail, we blame the leader, and seek a better one. Like drug addicts, each time we need a bigger hit.

Consider that ubiquitous organisation chart, with its silly boxes of “top”, and “middle”, and bottom managers. How come we never say “bottom managers”? This is no more than a distorted metaphor. It tells us that we are fixated on who has authority over what and whom. The painting may not be the pipe, but to most of us, the chart has become the organisation.

Isn’t it time to think of our organisations as communities of cooperation, and in so doing put leadership in its place: not gone, but alongside other important social processes.

[O]bsession with leadership is the cause of many of the world’s problems. [L]et us get rid of the cult of leadership, striking at least one blow at our increasing obsession with individuality. Not to create a new cult around distributed leadership, but to recognize that the very use of the word leadership tilts thinking toward the individual and away from the community. We don’t only need better leadership, we also need less leadership.

via FT.com.

Managers who claim to know the future are more often dangerous fools than great visionaries

As complex systems go, the interaction between the ball in flight and the moving fieldsman is still relatively simple. In principle, most of the knowledge needed to compute trajectories and devise an optimal strategy is available: we just don’t have the instruments or the time for analysis and computation. More often, the relevant information is not even potentially knowable. The skill of the sports player is not the result of superior knowledge of the future, but of an ability to employ and execute good strategies for making decisions in a complex and changing world. The same qualities are characteristic of the successful executive. Managers who know the future are more often dangerous fools than great visionaries.

(…) Good predictions may be available in structured, well-ordered, situations – but, even then, forecasts are properly conditional or probabilistic. There are few certainties about the future: but one is that hedgehogs who make confident statements on the basis of some universal theory will be as persistently misleading counselors in the future as in the past. And that the foxes (…) who scramble everywhere for scraps of information will provide better, if more nuanced, advice.

via John Kay.

Why management matters

The [2008] crash illustrates the first reason why management matters: when it screws up everyone suffers. But why it screwed up relates to its role as a carrier of ideas.

This derives from the built-in amplifier that is the power of expectation. Well known to social science as self-fulfilling prophecy, expectation has the power to create its own reality. If managers expect subordinates to perform well, expectations tend to lead to better performance. The reverse is also true.

The consequences are profound. In management and economics, the battle of ideas is decided not by which best explain the world but which most affect it and thereby become true as a result of their influence. Companies are the battleground.

Firms whose managers act on the principle that employees are self-interested opportunists who must be forced to do their job will tend to create just that. Conversely, a company that functions on the basis of trust and co-operation creates a system in which honest, co-operative people flourish. Self-fulfilling prophecy makes every company a force for either good or ill.

Since the 1980s, the assumptions baked into the management model are the pessimistic ones. In the crash of 2008 we can see where the template based on them (incentives, compliance with letter rather than spirit, rejection of ethical considerations) leads.

If the 21st century that management makes possible is to end happily, managers will have to absorb its most important lesson from the 20th: what matters most in management is not what you make but what you believe.

via Simon Caulkin.

All of business is about values, all of the time

via The Management Myth:

All of business is about values, all of the time. Notwithstanding the ostentatious use of stopwatches, [Frederick] Taylor’s pig iron case was not a description of some aspect of physical reality—how many tons can a worker lift? It was a prescription—how many tons should a worker lift?

The real issue at stake in Mayo’s telephone factory was not factual—how can we best establish a sense of teamwork? It was moral—how much of a worker’s sense of identity and well-being does a business have a right to harness for its purposes?

Leçon pour chefs d’entreprise: « Václav Havel a toujours douté de lui-même »

Portrait of Václav Havel, a Czech playwright, ...
Václav Havel

Je me souviens toujours des mots de Platon selon lequel au pouvoir il faut des gens qui ne veulent pas gouverner. C’est exactement le cas de Havel.

Il a toujours, tout au long de sa présidence, beaucoup réfléchi sur lui-même, il a fait beaucoup de choses pour se défendre de devenir un politicien professionnel. Il a toujours douté de lui-même, et parfois avec ses amis il avait même l’air d’avoir honte d’être au pouvoir.

via Jan Sokol- Radio Prague.

The Dumbest Idea In The World: Maximizing Shareholder Value

A Forbes piece on Roger Martin‘s book Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL. I have not read the book yet. But I definitely will.

The “real market,” Martin explains, is the world in which factories are built, products are designed and produced, real products and services are bought and sold, revenues are earned, expenses are paid, and real dollars of profit show up on the bottom line. That is the world that executives control—at least to some extent.

The expectations market is the world in which shares in companies are traded between investors—in other words, the stock market. In this market, investors assess the real market activities of a company today and, on the basis of that assessment, form expectations as to how the company is likely to perform in the future. The consensus view of all investors and potential investors as to expectations of future performance shapes the stock price of the company.

“What would lead [a CEO],” asks Martin, “to do the hard, long-term work of substantially improving real-market performance when she can choose to work on simply raising expectations instead? Even if she has a performance bonus tied to real-market metrics, the size of that bonus now typically pales in comparison with the size of her stock-based incentives. Expectations are where the money is. And of course, improving real-market performance is the hardest and slowest way to increase expectations from the existing level.”

via Forbes.