BUSINESS RESEARCH

Use Behavioural Strategy for Better Strategic Decisions

Cognitive biases are often a result of our attempt to simplify information processing. They are rules of thumb that help us make sense of the world and reach decisions with relative speed. These personal rules are very often unconscious.

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August 2016

In the management context, research refers to them as the “CEO toolbox”. It develops over the course of a manager’s life and enable managers to routinely complete recurring tasks and to be able to quickly diagnose new ideas and topics. These rules are basically characterised by the manager’s need to take swift actions.

While biases can often be surprisingly accurate, they can also lead to errors in thinking. Yet very few corporate strategists making important decisions consciously take into account their cognitive biases.

In times of uncertainty and when facing overriding emotions in the industry such as “fear and worry”, it can be even more vital for strategic decision making leaders to recognise their own biases.

Action-oriented biases1-5
Excessive optimism
Overconfidence
Competitor neglect
Drive us to take action less thoughtfully than we should 
Interest biases 
Misaligned individual incentives
Inapproriate attachments
Misaligned perception of corporate goals
Arise in the presence of conflicting incentives, including non-monetary and even purely emotional ones 
Pattern-recognition biases 
Confirmation bias (favoured belief)
Generalising based on memorable examples
Assessment of ideas depends on who introduces them
Lead us to recognise patterns even where there are none 
Stability biases 
Anchoring and insufficient adjustment
Loss aversion
Sunk-cost fallacy (historical costs vs. future action)
Status quo bias (no pressure for chance = no chance)
Create a tendency toward inertia in the presence of uncertainty 
Social biases 
Groupthink (striving for consensus)
Sunflower management (groups align with the views of their leaders)
Arise from the preference for harmony over conflict 

Sources: Sources: Madique, M. (2011). The Leader’s Toolbox. Unpublished manuscript; Lovallo D. and Sibony O. (2010); The case for behavioural strategy, McKinsey Quarterly 2010, [Online]. Avaliable: http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-case-for-behavioral-strategy, [20 July 2016]; Nagel, C. (2014) Behavioral Strategy. Thoughts and feelings in the decision making process. The unconscious and the company’s success, Unternehmer Mediien GMBH, Germany: Behavioral Strategy Institute.

Referenced techniques

Technique

Cognitive Bias

Cognitive bias is a distortion in the way we perceive reality. This concept provides a comprehensive review of the cognitive bias that can affect individuals and organisations. You will also gain an understanding of the different kinds of biases and how to use techniques to level the playing field.

Technique

Bounded Rationality Model of Decision-Making

The concept provides a review of the practical decision-making process and explores the model’s strengths, limitations and implications by comparing it to the rational behaviour model.

Technique

Capability Management

Capability management is an effective technique for creating market change and to sustain long-term competitive advantage in fast-moving markets. Learn how to use dynamic capabilities as organisational and strategic routines to deploy and reconfigure your firm’s resources.

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