Saturday, 28 February 2009

Get other gamblers on board

“When people are in groups, they make decision about risk differently from when they are alone.”

If you want support for a risky decision, then present it for approval to a board full of gamblers. Corporate governance codes imply that collective decision making is a way to reduce, or at least control, risky random decisions. You might think that is obvious. But psychology research suggests the reverse. In a group, accountability is reduced and each gambler is reassured by the support of other gamblers.

An individual is likely to make riskier decisions in a group, since the shared risk makes the individual risk less. Various researchers have suggested that:
  • greater risks are chosen due to a diffusion of responsibility, where emotional bonds decrease anxieties and risk is perceived as shared.
  • high risk-takers are more confident and hence may persuade others to take greater risks.
  • social status in groups is often associated with risk-taking, leading people to avoid a low risk position.
  • as people pay attention to a possible action, they become more familiar and comfortable with it and hence perceive less risk.

Ref. “The Risky Shift Phenomenon”

Thursday, 26 February 2009

Prepare to make decisions that are close to random

“In a job like mine… you only really have a 55% chance of being right, now matter how bright you are.” James Crosby (then CEO of a major UK bank).

Bear in mind that 55% right is this Crosby’s self-interested assessment of his own performance. His track record may not in fact be that good.

As you move up the management hierarchy, the laws of chance play a bigger part. On each promotion you must make bigger decisions, but collecting all the relevant information grows harder and/or you get less inclined to do it.

Perhaps the data you need is uncollectable, perhaps it is unknowable. Perhaps your information systems are inadequate. Perhaps you are a gambler by nature, you don’t personally have an interest in collecting data or analysing the data you are given.

Whatever the reasons, promotion tends to require and reinforce a willingness to take bigger risks, make bigger gambles.

Be willing to make decisions with little evidence

As the earlier principles showed, a manager has to gamble now and then. What happens after you make a less-than-fully-informed decision? If the effect of your decision is good, then your business advances. If its effect is bad, your business retreats.

Suppose you have a foothold on the promotion ladder, and you make decisions whose outcome is uncertain. You can be unlucky, may accidentally make a few ‘bad’ decisions in succession, and lose the chance of promotion. Or you can accidentally make a succession of ‘good’ decisions, and gain promotion to a higher level of management.

Thus the forces of evolution will have their effect on both your business and your career. A common view is that promotion requires “schmoozing” or “brown nosing”. A streak of good fortune will probably serve you better.

Gambles lead to evolutionary changes

Intelligent design may be a professional approach. But it is hard work. You may find you can get on more easily by taking chances.

It is a jungle out there. Both the progress of a business and the promotion of its managers can be viewed as processes of evolution, in which there is natural selection of those advantageous variations that result from random changes.

Darwin summarised his theory of evolution on page 5 of “On the Origin of Species”. We paraphrase and adapt that summary as follows.

“Many more employees are employed in an organisation than can possibly be promoted to senior levels; and consequently, there is a never ending struggle for promotion.
Any employee whose decisions appear more profitable will have a better chance of being selected for promotion.
And the promoted employees will tend to repeat the decision making processes that led to their promotion.”

The progress of your business is driven by management decisions, each of which can lead to an improvement or deterioration in the business. Your management decisions can be rewarded by an improvement in the business and an increase in your authority, even if you made those decisions with little or no certainty about their impact on the business.

Some of your management decisions will approach random in that sense, but not in all senses. You will apply intelligence and experience to the decision making. You will take care especially to consider the short-term impact on your salary or bonus. And consider what will help you survive in the surrounding culture.

There is another angle to our take on evolution. The “alpha male” gets to boss a troop of apes. Promotion to a senior level will require you to be seen and selected by others as an alpha character. This is still a sought-for selection criterion in top jobs. Indeed, you do need some alphaness to carry through a top job, though that is not necessarily associated with the other competencies needed to manage a complex business.

Data shortages turn decisions into gambles

Analysers prefer to have the facts in front of them before they make a decision. However, many business decisions hang on unknowable information and will have unpredictable impacts.

Some information is knowable or predictable (say, details of a hotel in Scotland).
Some is unknowable or unpredictable (the weather when you get there).
Sometimes, however much time you have and effort you make, the costs and/or benefits of a decision are so difficult to predict that your decision will remain ill-informed.
For many projects, the immediate costs are relatively predictable but long-term benefits are unpredictable.

Don’t search for data that doesn’t matter. Make an educated guess based on assumptions about the unknowable. Change the assumptions, and if the answer changes (that is called sensitivity analysis), then try to firm up the information.

Since (be it for lack of time or lack of data) some management decisions are educated guesses – even gambles - you can regard them as leading to random changes in the fortunes of the manager and the organisation. Thus the forces of evolution start to work, which brings us to the main points of our essay.

Make decisions only when needed

"If there's one thing I've learned in politics, it is: never make a decision until you have to." (Margaret Thatcher)

The earlier you make a decision, the more likely circumstances will change before the decision can be implemented. Also, you can miss an opportunity that becomes available on waiting. So, you can reduce the risk of misguided decisions by not taking them too early.

On the other hand, bear in mind that your peers and partners may give up waiting for your decision, and do their own thing, thus reducing your options.

Despite our best attempts to be satirical, some serious advice on decision making has crept in here and there. If you want more advice, the web is your friend.

Here is one specific paper on decision making.

HR can't help you

You work for a large organisation. Your Human Resources (what a scary and dehumanising term that it is) department has devised a tabular job framework. The columns represent different kinds of job. The rows represent steps up the promotion ladder. Documented competencies are needed to progress from one level to the next higher one. So you can plan your route to the top of company? Right? Wrong!

Your promotion might be arrested by The Peter Principle. You may reach your "level of incompetence" and remain there. But what competencies really matter in promotion to a high level? Not necessarily the documented competencies.

Consider two kinds of competency - analysis and gambling – as two kinds of people. Analysers make decisions on the basis of information. Extreme analysers collect as much as information as possible before they make a decision. By way of contrast, gamblers make decisions on little information. Extreme gamblers make decisions on the basis of information so inadequate that their decision is near to random.

As an analyser, you will read career guidance, then take care to acquire and demonstrate the documented competencies. You may thus reach the top grade in the job framework. When you get there, you will be frustrated to find you are not a member of the top management team and are unlikely to be invited to join it.

However well your organisation has designed and documented its formal career paths, the route to the top management table is uncharted. An informal hierarchy overlays your formal tabular job framework, and it becomes more important as you rise through the organisation. Promotion in this hierarchy does not depend on gaining qualifications. Other factors matter more than documented competencies.

An analyser’s first instinct is to apply rational thought to a business issue; fact gathering and analysis are their tools of choice. Gamblers prefer to apply social skills to the same business issue; they develop and hone these skills to their purposes.

Promotion depends partly on the personality you reveal in work place social interactions. In the public sector of old, the sherry party and the Masonic lodge played their part. Now, more likely, it is the golf course and the management away day.

Promotion depends also on others’ recognition of your skills and successes. Considerable effort is needed to appreciate the skill of the analyser – since it involves following their analysis. What you need is a track record of “making a difference”. Or rather, you need others to associate you with successful innovations and decisions, and to perceive you as having such a track record. So, how to acquire this reputation?

An introduction to the principles

“Do you ever see directors approach a strategic decision with dispassionate analysis? Don’t you find they start with their instinctive decision (influenced by emotions and self-interest) and then happily use any misleading argument or irrelevant facts to dispose of any argument standing in the way of deciding as they want?” Anon

That was the kind of thing people were saying to us, and we were saying to each other, before we decided to stop moaning and work out why. (We are a senior civil servant, a company director with experience of technical risk management, and a CxO in an IT company.)

We want to explain why the top-level directors of a large organisation can be so clever yet make such bad decisions. We set out here to explain some behaviour of directors, and some features of their decisions making processes.

We will draw several threads together:
the theory of evolution (on the 200th anniversary of Darwin’s birth);
the factors at work in promotion of managers to director level;
the calls in recent years to ‘strengthen business governance’; and
how evolutionary principles might be applied to the current crisis in banking.

You can compare the race for survival between enterprises in a competition with each other with the race for survival between individuals and species in the theory of evolution. We consider the race for promotion in the same light.

We don’t insist that our principles are good or bad. We think of them as the natural consequences of evolutionary forces and human nature. You the reader may choose whether you use the principles or decry them.

Despite our best attempts to be satirical, some advice on professional decision making has crept in here and there. And we give you some references to follow up.

It is encouraging to find our principles are endorsed by others.

“In a job like mine… you only really have a 55% chance of being right, now matter how bright you are.” James Crosby (then CEO of a major UK bank).

Before we set out our principles, let us a recap some established principles.

The Peter Principle (Laurence Peter)
"In a Hierarchy Every Employee Tends to Rise to His Level of Incompetence"

The Dilbert Principle (Douglas Adams)
“The most ineffective workers are systematically moved to where they can do the
least damage: management.”

“Power tends to corrupt” (Lord Action)
"I cannot accept your canon that we are to judge Pope and King unlike other men with
a favourable presumption that they did no wrong. If there is any presumption, it is the
other way, against the holders of power, increasing as the power increases.”

The theory of evolution (Charles Darwin)
You will know that evolution works on the basis of random changes, some of which
lead to an individual having an advantage over others

Parkinson's Law (Cyril Northcote Parkinson)
"An official wants to multiply subordinates, not rivals"