Effective Decision Making
At the end of the day, the quality of a leader’s decisions is the difference between success and failure. Decisions about hiring, firing, and promotions, strategy, key tactical decisions, investments, governance, culture, and so much more are the drivers behind every success story. Sound decisions, at the end of the day, are what a leader is hired to do.
But the decision-making process can be extremely complex and is fraught with biases. “Overconfidence bias” is where a leader is excessively confident in their ability to see the future. The Dunning-Kruger effect, as it is known, is where an individual overestimates their knowledge or expertise on a subject, and this creates overconfidence. Negative bias is where we give more importance to negative results than to positive results.
Another common decision bias is called “confirmation bias.” This is where the decision maker subconsciously (or perhaps consciously) finds evidence that supports their predisposition and disregards evidence that is contrary to his or her thinking. For example, someone might use the fact of a winter storm to support their belief that climate change is a hoax. But, of course, a winter storm does not refute the fact that the earth’s temperature is rising significantly. Scientists measure the earth’s average temperature over time, and they do so with objective scientific instruments and calculations that are all subject to peer review to eliminate errors. Yet, not infrequently, a person will take one data point over many objective measures because that data point confirms their preconceived decision. This is confirmation bias.
As the CEO of Bridgestone Americas in 2010, I witnessed this from afar in the actions of some of our competitors. The BRIC countries (Brazil, Russia, India, and China) were popularized by Goldman Sachs in the first decade of this century. The BRIC countries were to grow by leaps and bounds while the United States was expected to have a slow growth rate. In other words, the United States was, according to the theory, essentially a has-been economy while the future lay in the hands of the BRIC countries.
Experts were bullish on Brazil’s future because of its large population, extensive natural resources, and rapidly growing “middle class.” To take advantage of Brazil’s anticipated rapid economic growth, some of our competitors invested heavily in tire manufacturing capacity in that country. This is no small undertaking as a tire plant can cost upwards of $500 million and it can take many years to get a payback on the investment.
Because my responsibilities included North, South and Central America, we had to decide (subject to Board and shareholder approval) what investments we would make in Brazil.
How easy would it have been to simply follow the lead of our competitors as well as what the experts were saying about Brazil’s soon to be rapidly growing economy?
But we performed our own deep dive into the country’s economic prospects. We met with consultants and economists, we personally toured parts of the country, and we poured over the country’s economic, social, natural resource, and demographic data. We also tried to understand the country’s political and governance effectiveness and tax laws.
We discovered that while Brazil had opportunities, there also were concerns. The rapidly growing Brazilian middle class had significant personal debt and their income level could not easily support significant additional purchases. Further, Brazil had a reputation for significant corruption, violent crime was a serious issue, and its infrastructure needed significant improvement. Finally, in our opinion, the country’s tax structure was exceedingly complex and not particularly conducive to economic growth.
For these reasons, we overcame our confirmation bias and decided not to follow the lead of our competitors and the advice of the experts by making very large investments at that time.
As it turned out our caution was appropriate. Brazil, so far, has not fulfilled its part of the BRIC economies. Since 2010, Brazil’s GDP has declined, both in real terms and on a per capita basis. That certainly can change in the future, and for the sake of the wonderful Brazilian people, I certainly hope it does.
But for our discussion now, the point is this: decisions about strategy, investments, people, etc., are everything for leaders. That is ultimately what determines success or failure. Eliminating confirmation bias and other decision biases is critical if the right decisions are to be made. And that, of course, is a leader’s responsibility.