During crisis, we are all pushed to make strategic, life-changing decisions. Often we need to make these decisions under a lot of uncertainty and with incomplete and faulty information.
Below, I review some of my favourite cognitive biases with a couple of examples of how they may be influencing your and your counterpart’s decisions.
You can print this list and keep in in your drawer as a check list on how to survive yourself and the other survivors during this period.
In the early days of a crisis, there is a lot of uncertainty: at the macro level, questions like how long the crisis will last, how effective the solution will be and, what will be the direct and indirect impact of this on your business, your clients, partners and competitors are very troubling questions.
On top of these, micro questions like how will these change the demand for your products, what emerging business models will be successful and what implications all these changes will have to your risk profile; and individual questions like what is the impact on the your health, your team’s and your loved ones and what is the impact on your job security, growth prospects and personal investments.
1. The need to hide vulnerability & overconfidence:
Because out there, uncertainty is going through the roof, inside your organization’s walls, the value of decisiveness and quick, effective responses have just skyrocketed. Leaders who cannot provide a clear plan and marshal their resources will quickly face paralysis and loss of confidence.
So your first temptation will come disguised with justifications such as “the organization needs a clear vision and plan” and “good leaders must reduce anxiety in the organization”.
Overconfidence creeps in (LINK) and planning scenarios become less imaginative and variability narrower and are eventually downgraded to base case, downside and upside and management return to their task of managing deviations.
2. Ambiguity aversion:
To understand and navigate through the current level of uncertainty, scenarios and mapping alternative courses of action and their implications are critical. In fact, there are so many very important questions that the only way to grasp them all is by looking at specific broad scenarios, each explicitly examining interdependencies among different uncertainties it and understanding how uncertainty in assumptions translate into limitations of your decisions.
When doing this, some decisions will result in less uncertain outcomes than others – like closing a business unit and liquidating its assets. Converting assets into cash mitigates most of the business uncertainties associated with the business at a time when it may be impossible to estimate the value of these assets.
Ambiguity aversion is the tendency to avoid options for which the probability of a favorable outcome is unknown. Not having a mental model for the future is painful and people will chose worse options if the uncertainty associated with these options is low. (LINK)
Your second temptation will be insidious and invisible: weighting down on some scenarios and options and making poor choices look more attractive than they actually are.
3. Availability heuristic
Availability heuristic is the tendency to overestimate the likelihood of events that are easier to recall. So, recent experiences, unusual events and emotionally charged memories tend to prime how we think of scenarios and how we evaluate their likelihood. (LINK)
The attraction of analogies like comparing the impact of the Covid-19 crisis with the 2008 crisis sprout from this. And, to the extent that it expands our vocabulary and range of variables we use to describe in our scenarios, it is a healthy exercise. But when they become anchors that limit our comprehension of the events as they unfold, they can seriously damage the quality of our response.
The third temptation will corrupt your prioritization: evaluating scenarios takes time which is a scarce asset at the moment, and probabilities must be assigned based on a systematic approach or the impact of decisions becomes diluted.
4. Groupthink
Groupthink creates a sense of security and illusion of agreement that people crave during uncertain times (LINK).
Do you remember the old adage: “it is better to err with everyone else than to be right alone?”. This is especially true during uncertain times – when the personal cost of failure is high.
The fourth temptation will come as self-doubt and fear of failure: how likely is it that you outsmarted everyone else as opposed to overlooked some critical factor? How likely is it that, EVEN if you are right, things might turn out against you and your unorthodox answer is blamed for a bad outcome? How likely is it that your organization will mutiny, implement your decisions half-heartedly or become anxious about that?
5. Belief bias, confirmation bias & outcome bias
Finally, the last one on my list is when we evaluate arguments based on the believability of their conclusions and our preferences for outcomes. Then, we look for evidence that confirms these beliefs instead of monitoring for evidence that contradicts them.
This is why so many leaders mistake positive market movements for indications that the worst is over and upside swings for reversions to the mean. Many emerging attackers will have a hard time adjusting their business models because, while attackers are traditionally agile at adapting their tactics they tend to be rigid around their original goals (even when external factors mean that the original goals became obsolete) and will receive false hope from small corrections that will undermine their efforts to make drastic changes.
The fifth temptation will come in the shape of comfortable, convenient truths. It will tell you that you do not need to re-evaluate your assumptions if things are working your way. It will pet you on the back with words of encouragement.
