Updated: Jul 2, 2020
Last week I wrote about self-aware decision making. Today I’m going a bit deeper on how biases and personality can lead to poor decisions, and how you can compensate for them.
My own cognitive biases
We all have biases in the way we make decisions. There’s plenty of good research and articles on decision making bias - Wikipedia lists well over 100 different types.
The important thing here is to recognise which biases are more dominant for you and impede your ability to make good decisions. I learned that I had a few obvious ones for which I needed to adjust.
I had a natural tendency to be overly optimistic. Of course, this is not bad for an entrepreneur, but it is a good example of where a strength can become a weakness. At Aconex, I always thought we could do more. When setting targets and budgets, I tended to believe we could grow faster, sell more and do it with less resources than was possible. To negate this bias, I used forced prioritisation to ensure we didn’t try to do too much, but it sometimes took the leadership team to push back and highlight times when we were going to have too much on our plate to succeed.
For example, when we entered the US market we tried to serve all construction project segments, as we did in Australia. Commercial, high-rise residential, retail, infrastructure, mining, oil, gas – we tried to do it all at once. I was optimistic that we would win across the board, as we eventually had in Australia, and we didn’t initially make the hard call to narrow our focus. But after going through the “main-focus” process (highlighted below) we became much more targeted, selling into segments where we had the strongest competitive advantage – including infrastructure, mining, oil and gas. The result was a rapid acceleration of our US growth.
The IKEA effect:
This is a common bias for founders, where we place disproportionate value on things we’ve personally been involved in building, even if the end result – whether a strategy or a bookcase - is slightly imperfect. In my case, it was to cling to a plan or initiative when a change of direction was needed. Per my post last week, this why it’s vital to encourage your team to actively participate in decision-making so you don’t rely on your perspective alone.
One example of how we worked around this bias was running a three-day leadership team offsite solely to identify our “main focus”. It was a year or so after the Global Financial Crisis and we were starting to reignite growth but had too many initiatives running concurrently. We brought in external consultants to facilitate a strategy review process, with the specific goal of defining where Aconex had unique competitive advantage. Going forward, these would be the only segments in which we would compete. I held back on providing my thoughts to provide space for the team, deliberately taking a back seat early on in the process so that we generated plenty of ideas and perspectives within the group.
Using this “main-focus” process, we left the three-day workshop with a more targeted strategy than we had had before. We put a stop to several initiatives and doubled down on key market segments, particularly in the US where we believed focus was essential to winning. This shift underpinned a period of rapid growth for the company in the years following the GFC.
Understanding how your personality affects decision
Just as we all have cognitive biases, we also have personality traits that can magnify their impact. In my case I had several characteristics that risked feeding into poor decisions.
Rob and I developed the idea for Aconex over several after work squash games. On or off the court, I’m a little competitive (some might call that an understatement!) and I just don’t like losing. It’s an example of a generally positive trait in a founder that can sometimes skew decision-making the wrong way. In our early years when I was involved in every deal it could be a problem when closing new sales. I never wanted to lose a deal, which meant that I could be too ready to give in to customer demands and too quick to discount. It certainly helped our customers but it didn’t always get the best result for the company.
Another aspect of my personality is that I love solving problems. Whenever a manager came to me with a problem somewhere in the company, I’d dive straight in and try to solve it. I often knew a lot about the background and wanted to help resolve it as quickly as possible. But the downside was that it didn’t help managers build their own capability. Over time I became more comfortable letting the team resolve issues. I’d identify the company-wide or strategic problems to get involved in, but otherwise I’d just ask some questions and help with the context, and empower managers to solve problems within their own functions.
As a final personal example, I really valued loyalty to the company. Building the business was often fun but not without its challenges and, as we grew, I saw enormous passion and commitment from the team at all levels. It was important for me to reciprocate this loyalty and it certainly helped build a strong culture within Aconex. But it also clouded some people related decisions for me. For example, I know now that I could be too slow in dealing with underperformers. I learned that I had to be careful not to let my loyalty, particularly to early employees, obscure what needed to be done in moving people on, building capability, and allowing growth and renewal.
It is a good idea to review decisions you have made, particularly the ones you got wrong, to look for how cognitive bias and your personality can affect your decision-making.
Common cognitive biases
Below are some other common biases to look out for when making business decisions:
Confirmation bias - Searching out or attaching too much weight to information that confirms your initial opinion. This can be amplified by the ‘illusion of validity’ – too readily believing that your judgment is correct, especially when the information you base it on is correlated
Anchoring bias - Relying too heavily on one piece of information (often the first piece you have acquired). This is also known as “first impression bias” - the tendency to jump to a conclusion based on what you learned early in your research
Framing effect – The risk of drawing quite different conclusions from the same information, depending on how it is presented
Irrational escalation of commitment - Where you justify increased investment in a decision based on prior investment to date, despite new evidence suggesting that the decision may have been wrong. Also called the Sunk Cost Fallacy
Overconfidence effect - Excessive confidence in your own answers to questions, driven by self-confidence in your intelligence or experience. Overconfidence bias can go together with anchoring bias
Illusion of control - Overestimating the extent of your influence over external events
Selection bias - The tendency to become aware of something when something causes you to notice it more. An example would be buying a car and then noticing similar cars more often than before. This is also called the Observational Selection Bias.
To control for these and other biases, you must be honest with yourself and reflect on the decisions you have made and how you made them. What data did you rely on? Where did it come from and how was it gathered? How was the question asked and the decision process framed? Who was involved? And whose opinions did you weight more heavily?
As a founder or CEO, your personal growth and the success of your business will depend more than anything on the decisions you make. Not necessarily on getting every one right, but on developing a sound approach to decision-making that offers a framework to be used across the business. I hope that this series of posts has helped highlight the danger of personal biases and the importance of self-awareness in decision-making, and that it helps you and your teams confidently make decisions in times like these.