Tuesday, March 30, 2010

Strategic decisions: When can you trust your gut?

Mckinsey Quarterly, the business journal of McKinsey & Company, published this month a great interview (free registration required) with Gary Klein and Daniel Kahneman, two scholars representing opposing schools of thought, explore the power and perils of intuition for senior executives. The psychologist Daniel Kahneman is a Nobel laureate and a professor emeritus of psychology, his prospect theory helps explain the sometimes counterintuitive choices people make under uncertainty. Gary Klein is a senior scientist at MacroCognition, has focused on the power of intuition to support good decision making in high-pressure environments, such as firefighting and intensive-care units.

In this interview with Olivier Sibony, a director in McKinsey’s Brussels office, and Dan Lovallo, a professor at the University of Sydney and an adviser to McKinsey, Kahneman and Klein explore the power and perils of intuition for senior executives. Below are some passages of the interview:

The Quarterly starts the interview asking Gary Klein: In your recent American Psychology article, you asked a question that should be interesting to just about all executives: “Under what conditions are the intuitions of professionals worthy of trust?” What’s your answer? When can executives trust their guts?

Gary Klein answered: It depends on what you mean by “trust.” If you mean, “My gut feeling is telling me this; therefore I can act on it and I don’t have to worry,” we say you should never trust your gut. You need to take your gut feeling as an important data point, but then you have to consciously and deliberately evaluate it, to see if it makes sense in this context. You need strategies that help rule things out. That’s the opposite of saying, “This is what my gut is telling me; let me gather information to confirm it.”

Daniel Kahneman commented: There are some conditions where you have to trust your intuition. When you are under time pressure for a decision, you need to follow intuition. My general view, though, would be that you should not take your intuitions at face value. Overconfidence is a powerful source of illusions, primarily determined by the quality and coherence of the story that you can construct, not by its validity. If people can construct a simple and coherent story, they will feel confident regardless of how well grounded it is in reality.

The Quarterly asked: Is intuition more reliable under certain conditions?

Gary Klein: We identified two. First, there needs to be a certain structure to a situation, a certain predictability that allows you to have a basis for the intuition. If a situation is very, very turbulent, we say it has low validity, and there’s no basis for intuition. For example, you shouldn’t trust the judgments of stock brokers picking individual stocks. The second factor is whether decision makers have a chance to get feedback on their judgments, so that they can strengthen them and gain expertise. If those criteria aren’t met, then intuitions aren’t going to be trustworthy.

Daniel Kahneman: This is an area of difference between Gary and me. I would be wary of experts’ intuition, except when they deal with something that they have dealt with a lot in the past. Surgeons, for example, do many operations of a given kind, and they learn what problems they’re going to encounter. But when problems are unique, or fairly unique, then I would be less trusting of intuition than Gary is. One of the problems with expertise is that people have it in some domains and not in others. So experts don’t know exactly where the boundaries of their expertise are.

The Quarterly: Many executives would argue that major strategic decisions, such as market entry, M&A, or R&D investments, take place in environments where their experience counts—what you might call high-validity environments. Are they right?

Gary Klein: None of those really involve high-validity environments, but there’s enough structure for executives to listen to their intuitions.

Daniel Kahneman: In strategic decisions, I’d be really concerned about overconfidence. There are often entire aspects of the problem that you can’t see—for example, am I ignoring what competitors might do? An executive might have a very strong intuition that a given product has promise, without considering the probability that a rival is already ahead in developing the same product.

Gary Klein: Danny and I are in agreement that by the time executives get to high levels, they are good at making others feel confident in their judgment, even if there’s no strong basis for the judgment.

They agreed about the selection processes for leaders tend to favor lucky risk takers rather than the wise. Daniel Kahneman said: No question—if there’s a bias, it’s in that direction. Beyond that, lucky risk takers use hindsight to reinforce their feeling that their gut is very wise. Hindsight also reinforces others’ trust in that individual’s gut. That’s one of the real dangers of leader selection in many organizations: leaders are selected for overconfidence.

Gary Klein commented: I agree. Society’s epitome of credibility is John Wayne, who sizes up a situation and says, “Here’s what I’m going to do”—and you follow him. We both worry about leaders in complex situations who don’t have enough experience, who are just going with their intuition and not monitoring it, not thinking about it.

They also agreed about the premortem technique, a theory developed by Gary Klein. He said: The premortem technique is a sneaky way to get people to do contrarian, devil’s advocate thinking without encountering resistance. If a project goes poorly, there will be a lessons-learned session that looks at what went wrong and why the project failed—like a medical postmortem. Why don’t we do that up front? Before a project starts, we should say, “We’re looking in a crystal ball, and this project has failed; it’s a fiasco. Now, everybody, take two minutes and write down all the reasons why you think the project failed.” The logic is that instead of showing people that you are smart because you can come up with a good plan, you show you’re smart by thinking of insightful reasons why this project might go south.

Daniel Kahneman commented: The premortem is a great idea. I mentioned it at Davos—giving full credit to Gary—and the chairman of a large corporation said it was worth coming to Davos for. The beauty of the premortem is that it is very easy to do. My guess is that, in general, doing a premortem on a plan that is about to be adopted won’t cause it to be abandoned. But it will probably be tweaked in ways that everybody will recognize as beneficial. So the premortem is a low-cost, high-payoff kind of thing.

But they disagreed about checklists. Daniel Kahneman said: I like checklists as a solution; Gary doesn’t.

Gary Klein said: I’m not an opponent of checklists for high-validity environments with repetitive tasks. I don’t want my pilot forgetting to fill out the pretakeoff checklist! But I’m less enthusiastic about checklists when you move into environments that are more complex and ambiguous, because that’s where you need expertise. Checklists are about if/then statements. The checklist tells you the “then” but you need expertise to determine the “if”—has the condition been satisfied? In a dynamic, ambiguous environment, this requires judgment, and it’s hard to put that into checklists.

Daniel Kahneman: I disagree. In situations where you don’t have high validity, that’s where you need checklists the most. The checklist doesn’t guarantee that you won’t make errors when the situation is uncertain. But it may prevent you from being overconfident. I view that as a good thing.

The Quarterly finished the interview with the question: Yet senior executives want to make good decisions. Do you have any final words of wisdom for them in that quest?

Daniel Kahneman: My single piece of advice would be to improve the quality of meetings—that seems pretty strategic to improving the quality of decision making. People spend a lot of time in meetings. You want meetings to be short. People should have a lot of information, and you want to decorrelate errors.

Gary Klein: What concerns me is the tendency to marginalize people who disagree with you at meetings. There’s too much intolerance for challenge. As a leader, you can say the right things—for instance, everybody should share their opinions. But people are too smart to do that, because it’s risky. So when people raise an idea that doesn’t make sense to you as a leader, rather than ask what’s wrong with them, you should be curious about why they’re taking the position. Curiosity is a counterforce for contempt when people are making unpopular statements.

This is a great interview, with good insights about strategic decisions. The power and perils of intuition for decision makers are analyzed under two interesting points of view.

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