Transcript
Speaker: When it comes to making decisions, a lot of business leaders think that they have a golden gut. That may be a big mistake. To find out why and how, tune into the next episode of The Market That Moves America. Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid -sized companies and help you take advantage of new opportunities.
Speaker: Today's podcast will discuss how leaders can make better decisions, traps they should avoid, tips they can follow. I'm Tom Stewart. I'm the executive director of the National Center for the Middle Market at the Ohio State University Fisher College of Business. We're the nation's leading research group focusing on mid -sized companies, the companies that produce a third of private GDP and employment and account for the lion's share of economic growth. They are the market that moves America.
Speaker: The National Center for the Middle Market is a partnership between Ohio State and Chubb. Gleb Supersky is with me today as a special guest. Gleb is an author, a scholar, and a consultant, a PhD in the history of behavioral science, a stint as a professor here at Ohio State. His consulting firm is wonderfully called Disaster Avoidance Experts.
Speaker: And he's the author of a number of books, the most recent of which is Never Go With Your Gut. How pioneering leaders make the best decisions and avoid business disasters. Gleb, welcome to the market that moves America.
Speaker: Thank you so much for having me on the show, Tom. It's a pleasure to be on. So I think most people, most business people think of themselves as pretty good decision makers. I mean, they almost define their jobs. My job is to make decisions, right? And I'm going to guess personally, that most of the time, most of them are mostly right. I mean, that for the most part, their decisions are pretty good. Is that right?
Speaker: Yes. So the term leader is synonymous with decision -maker. That's what the leaders are hired to do. And most of their decisions are right. Indeed, they are right. The problem is that they make a systematic pattern of errors in certain areas, which we can talk about, which scholars and cognitive neuroscientists like myself call cognitive biases.
Speaker: dangerous judgment errors that lead to pretty big disasters for businesses, which is my consulting firm is called Disaster Avoidance.
Speaker: Now, but most of the time they do make the right decisions, otherwise they wouldn't be in the positions that they are right now. So I want to get into what the characteristic kinds of bad decisions that they make, but in your experience, are there also characteristic times when they make a bad decision? I mean, it's not just, you know, this is the mistake I made, but make, but are there sort of occasions when I'm more likely to make one of these mistakes than others?
Speaker: Absolutely. So the first thing to think about is where you as a business leader make good decisions. We learn to make good decisions. Good decisions are not intuitive. They don't come from our gut intuition, which is a big problem in the pattern of thought of many business leaders. They think they're good decisions come from their gut. They don't actually. The good decisions come from
Speaker: a pattern of correct decisions that they learned to make. So, for example, nobody intuitively knows how to deal well with constructive critical feedback. If a customer tells you, you did this wrong and you did that wrong and you did that wrong, the intuitive thing to do is to shout back and say, no, I'm absolutely right. How can you tell me I'm wrong? But in order to get ahead in business, you can't do that. You also can't do that if your boss tells you the same thing.
Speaker: So leaders, business leaders have learned a lot of good habits. They've learned how to delegate effectively, which is a completely not intuitive behavior. Intuitively, we want to keep everything under our control. And it's very hard to let things go. So those are areas where they learn how to make really good decisions. And unfortunately, they transfer this thought pattern of themselves of good decision makers to the areas where they tend to make bad decisions. And those areas,
Speaker: are around major critical decisions where they don't have experience. Areas like mergers and acquisitions. So for example, research has shown that over 70 % of mergers tend to go badly, tend to go wrong, over 70 % of acquisitions. Hiring key people is a very rare thing that business leaders do, and they often make mistakes in this area. And then strategic planning. This is an area where there's terrible, terrible mistakes that leaders make
Speaker: because they don't have experience in this. It's a very hard thing to do, and they don't do it often. John, I'm struck by the first that you said the M &A experience. One of the things that we learned in a study of M &A from middle market companies is that in the course of a given year, about 20 % of middle market companies will make a deal on average. About 20 % will make some kind of an acquisition, often a very small one, but it's an acquisition.
Speaker: But something like, I'm trying to remember the number, something like 40 % of middle market companies, when asked about the last deal they made, said it was the first deal that they had ever made. So they're babes in the woods. They hadn't done it before. And they often didn't. They didn't have the personal experience. And a lot of the close -in people on their teams didn't have personal experience with it, too. So they were naive. And I think the same thing is true of hiring a deputy. How many times do you do that? A really critical hire.
Speaker: Absolutely, absolutely. And the problem with mergers and acquisitions in particular for middle market companies is that they tend to focus on the external aspects of the firm. Most middle market companies don't have experience with mergers and acquisitions, and they don't understand that as important as external assets are, sometimes the internal assets are even more important. The internal culture, what is the internal culture of the firm with which you're trying to merge
Speaker: and the internal systems operations. Your systems operations may be very different from theirs, and they may not clash. I was recently doing a consulting contract with someone who actually went into a merger and acquisition, and they discovered a very serious clash between their culture and systems operations.
Speaker: and the culture and systems operations of the company with which they merged. And they got into such a mess because they had a lot of tensions. A lot of the people who they thought would stay from the company that they acquired ended up leaving, unfortunately. And they couldn't decide which systems, which operations to use. So they lost quite a bit of money on that. And they learned that they should not have done that in the first place. And then, you know,
Speaker: I worked with them on recovering from that pretty bad disaster. So one of the things that happens is if I haven't got data, I haven't got experience, maybe I don't have very good advisors. And the same thing, by the way, goes on strategic planning. I mean, if you take a look at Fortune 500 companies, they may have windowless cube farms of people doing analytics on the market for widgets in
Speaker: Slovenia, whereas a middle market team may just have a few people doing some deep Googling, and there may not be a whole lot of capability there. So in the absence of data, people often do fall back on what they think of as their judgment, but may just be their gut. Is that what you find?
Speaker: That is exactly what happens because people, the leaders, business leaders of middle market companies are used to making good decisions in other areas and they think of themselves as good decision makers. But when they approach areas like mergers and acquisitions or strategic planning or making key hires, they tend to be greatly over confident.
Speaker: They tend to be very overconfident and too optimistic about the quality of their decisions. So what the research shows is that they don't consider nearly enough options. When I work with companies on mergers and acquisitions, I strongly encourage them to not only consider the first initial options that they look at, but to consider many more options that seems intuitive to them.
Speaker: comfortable to their gut and tuition, then they need to be much more skeptical about the success of their strategic planning, of their key hires, of the emergency acquisition, and be much more selective about opportunities. So for example, if they want to enter emergency acquisition and they think that there's, you know,
Speaker: an 80 % chance that they will come out ahead of it. They should decrease this by half and go to 40%. That might be somewhere where that's the likely outcome. That's still a rough heuristic and a rule of thumb. I'm going to push back on you and say you're not being analytic enough. But let me ask you this. In your book, you sort of list, you have a good group of sort of five
Speaker: questions. I guess five questions you can ask yourself that might pull you back from the edge of making a gut decision that turns out to be ill -informed. And let's just talk for a second about each one of them. I mean, the first question is to ask yourself, is what important information have I not yet considered?
Speaker: Yes, that's a critical, critical question because it goes against the overconfidence that we tend that business leaders tend to have. By the way, I'm a business leader myself. I run my own firm.
Speaker: a small form of six people, so I know the kind of someone, when I speak of business leaders, I include myself. One important information that I not yet fully consider, it refers to addressing the overconfidence that we tend to feel, addressing the excessive optimism that we tend to feel, and looking at information that goes against our intuition. So it's impossible to make a list of things that would never occur to you. So how do you, I mean, if you think about this, how do I,
Speaker: What's a good way for me to consider information I haven't considered? To realize that, oh gee, I haven't thought about X. Yes, so this is the crucial thing that you want to look at is information that goes against your preferred option. So for example, I was working with a coaching client who had a lot of trouble making key hires, and I mentioned key hires number of times. And what I discovered when talking about how
Speaker: he makes, he hires, is that he talks to people, he has a conversation, and if he likes them, he takes them. And I asked him, do you, and of course that turned out to be a bad, quite a bad decision in a number of cases, which is why we're talking about coaching conversation. What happened when I asked him about it is that he never looked at factors that might go against his intuition. He never looked at, hey, let me ask the hard questions that might show that this person is wrong for the company.
Speaker: Same thing with mergers, requisition. What are the hard questions that might show that this company that you're trying to acquire is not going to be good for? Well, and that sort of goes to the one of the questions on your list of five is, is, is what would a trusted and objective advisor suggest I do? And that trusted and objectives advisor, or the Jiminy cricket on my shoulder, might be somebody who could remind me of the questions I haven't asked.
Speaker: Yes, so that is definitely a very useful question. We know that you want to find someone who is a peer, who doesn't have a bone in the game, someone who is an outside expert, whether if you're a board of advisors or something else.
Speaker: Who can give you objective information? It's so hard being a business leader, especially at the very top, because it's so lonely. People are very lonely. And they can't confide in their subordinates often. And they have to make this decision. They feel that they have to make this decision by themselves. And they don't think about all the resources that they can use
Speaker: to get advice on this matter to address the kind of dangerous overconfidence and excessive optimism that tends to strike business leaders and lead to a lot of disaster decisions.
Speaker: So another one of your questions of these five good questions was, what relevant dangerous judgment errors did I not yet address? So I mentioned cognitive biases. And we know that there are over 100 cognitive biases. Check it out on Wikipedia. You can see a list of over 100. My book talks about the 30 most dangerous cognitive biases for business and how we can address them. So my book, Never Go With Your Guts, I Am Near Leaders,
Speaker: make the best decisions, and avoid business disasters. Now, the cognitive biases, there are so many of them. I mentioned a couple already in this conversation. Another one that you want to think about is the cognitive bias of something false.
Speaker: When we tend to throw good money after bad, there are many, many business leaders who make a commitment to a project. And even when it turns sour, even when it goes bad, they keep throwing money after it partially because they don't want to feel like they waste their initial money. And they don't want to feel like they made a bad decision.
Speaker: And of course, they keep making these bad decisions. That's another danger of judgment error that I've seen many business leaders make. And then a fourth question. So the first three here were, what important information did I not yet consider? What would a trusted advisor suggest I do? What judgment errors have I not checked myself against? The fourth one is,
Speaker: Have I addressed ways I could fail? I guess imagining what happens if Pickett's Charge doesn't succeed, I mean, what's that about?
Speaker: And that's a really important one for any decision that you want to implement. Now, when the first three are meant to make the right decision in the first place, the fourth one goes into the implementation because you can make the best decision possible. You can make a really good decision to acquire a certain company. But if you don't implement the acquisition well, then it's not really going to help you.
Speaker: So, for example, when you have a strategic plan and you want to look at not simply what you think will happen, and that is, again, the optimism and overconfidence. One of the big, big problems with strategic planning for business leaders that I've seen, I mean, almost always when I look at business strategic planning, they have an over -optimistic plan and they don't address all the threats, all the problems, all the issues that can cause their strategic plan to fail.
Speaker: Same thing for a big project, not simply strategic planning, but big projects. I was working with one company in Philadelphia that was telling me where the business leader was telling me, kind of complaining about how projects that they start, the people who are under him did on projects. And they say it's two million, it turns out to be three million. They say it's four million, turns out to be six million, because they haven't thought about all the problems that can
Speaker: be that can happen with these targets. That's something we work on because that was really screwing him up in investing money in the appropriate way. Yeah. One of the things that's interesting about strategic planning is one of the questions executives almost never ask in the plan is how will my competitors react? Sometimes they won't react at all. But, you know, they anticipate you were going to do this, this and the other. And they forget that there are other players on the board who are also making plans. And so they might not have addressed
Speaker: how what reactions they do might cause. They just sort of imagine magical thinking to talk toward victory. And I guess the fifth question, which was related to this because these are all ideas of bringing in new information to
Speaker: test your gut is what new information would cause me to revisit the decision. Are you telling me there that sort of in advance I ought to write down and say, all right, here's my plan. I want to do A, B, and C. But if D, E, or F happens, should I have it written down in advance or thought of in advance that these things will make me revisit?
Speaker: Yes, exactly. So this is very important to think about when you're making the decision, what will cause you to change your mind. One of the biggest problems for business leaders, I've mentioned this with sunken costs, is that they tend to see strength in consistency. I made a decision, I will stick to it. Of course, it's much wiser and more effective to change our decisions based on new information.
Speaker: But it's very hard to do so in the heat of the moment, because we want to be consistent. We want to stick to our current decisions. However, if as part of the process of decision making, you say, OK, if this happens, we will shift things around. We will revisit the decision. We will do things differently. Then it makes it so much easier for leaders to be both appear as strong leaders while also steering the company in the right direction. That's one aspect of it.
Speaker: The second aspect of it is for group decision making. Now, you often in groups have a situation where there's going to be a few people who are against the original decision that came about. And so you'll have those people kind of saying, I told you so, let's change our minds, let's go against it. Whenever new information comes up, that may not be favorable. But if you agree in advance that, hey, we don't consider this small and favorable information, but if something major happens,
Speaker: then we will change our fights. So let's say if a product, you launch a product and it goes to, you want to make sure that it hits 10 million in the revenue in the first year. And it hits only 3 million in the first quarter and you sort of hit 5 million. You say, okay, no, that's not the issue that we're going for. We're going for 10 million in the first year. And so then you wait for a year to evaluate the product and how things are going.
Speaker: Yeah, it's interesting. One of the things that I think is interesting, particularly for mid -sized companies and founder -run companies, is often you start the company or you're used to managing with a group of people who you've been with for a long time. And maybe five of you started the company out of business school. Maybe it's a family business. Maybe your lawyer may be a lawyer who's been with you for a long time. So in many cases, you may get to,
Speaker: a group of people who know each other so well that they think too much alike. I guess there's a fine line between a smoothly integrated team on the one hand and group think on the other. So you want to build in some challengers into your inner circle, right? That is exactly right. That has to do with the question number three.
Speaker: What would a trusted and objective advisor suggest they do? So someone who is objective means that this person can take a step back from where the company is. You don't want to be this person to be part of the inner circle. You want this person to be external in some way. You know, maybe if you started your company from business school, you want the professor who is a mentor to you to be able to talk to this person. You want somebody who, you know, if you're in a business group,
Speaker: somebody who is in the business group, share of the business group. If you get a consultant, get somebody else who can provide you with that external information where the group, the internal group of people who are likely to be similar in mind can have someone external that they can bounce back ideas from and who can provide some of the critical perspective that is so needed when groups think alike because of overconfidence and overoptimism. This is a pattern called group things.
Speaker: where a group tends to align around a certain way of thinking that doesn't allow it to accept that their thought patterns and their decision making might be wrong. And this is why so many companies really go in that direction. I mean, if you look at what's happening with, let's say right now in Boeing. So if you look at Boeing, the decision's around 737 MAX.
Speaker: We can look at the largest leadership here. We're talking about how they have cubicle farms. They have huge cubicle farms. But look what happened. They were so confident about the history of safety of Boeing that they pressed ahead with Boeing 737 MAX, even though a number of engineers raised concerns and said, hey, we're not ready to release it. And look at where Boeing is right now. How many billions did they lose? At last count, I think it's over 30 billion.
Speaker: that they lost because of this really bad pattern of internal decision -making by the leadership who was overconfident and over -optimistic about the record of Boeing safety couldn't accept the idea that there might be something wrong with Boeing 733.
Speaker: So what I'm hearing and I sort of trying to this really interesting conversation, we could go on forever and sort of bring it to some sort of a close is first of all, I'm thinking that there are a bunch of things that are going on in the outside world that may be helping
Speaker: to objectify or help people avoid over -reliance on gut decisions. One of them is the emergence of analytics, so that stuff that was hidden may be more visible to me, and so I may have more actual evidence in front of me and less need to just put my finger to the wind and go with it.
Speaker: And the second thing is the emergence of these ideas of agile management, agile software development, sort of come out of software that sort of say, rather than design a project from beginning all the way to the end and then hope it flies, that we have check -in points along the way and we go from A to C and then check and then from D to G and then check and reshape as we go.
Speaker: Both of those may really help get stronger decision making going or help middle market executives have a better pattern, I guess, of how they approach decisions. Yeah, absolutely. We know that formulas and tools like analytics, which include formulas, experts,
Speaker: machine learning, things like Agile, they help us. These sorts of decision aids help us make better decisions because we are not only relying on our experience, but we were also relying on actual numerical data, which is much harder to
Speaker: be for that data to be excessively optimistic and overconfident, just data. Even if it's in front of you, even if it's on the screen, on the spreadsheet or around the conference table, you've got to have your eyes open and your ears open. I dare say you have to have your gut open to the opportunity to change your mind. The ultimate gut decision might be to have the guts to say, you know what? I was wrong.
Speaker: That's very important to be able to say that, but I would say even more important is the ability to distance yourself from your gut. So one of the big problems for business leaders is the inability to distance themselves from their gut intuition. When they feel comfortable with something, they feel that it's true.
Speaker: Well, very often, when we feel comfortable with something, it's not true at all. It's just completely wrong. When we feel comfortable with someone who we're having an interview with, that person, according to extensive research, may be just great at having interviews as opposed to being a great hire. When we feel great about a company that we want to acquire, we may not know anything about its internal culture, its internal process and system. We just like their external appearance.
Speaker: So, our gut reaction are not adapted for the current business environment. They're adapted for the Savannah environment. So, the business leader who truly wants to succeed needs to be able to distance themselves from their gut, learn that what feels comfortable is often exactly the wrong thing to do, and use the counterintuitive strategies that we're talking about here. Now, analytics and agile, these tools are counterintuitive. They go against our intuition.
Speaker: leaders need to really be effectively use counterintuitive tools, like the ones described in my book, Never Go With Your Guts, pioneering business leaders make the best decisions the way business disasters, to avoid these business disasters and maximize their success. That's, I think, what I want the takeaway message.
Speaker: And it's a terrific message. Gleb, I want to thank you so much. Gleb Zepersky is, as I said, the leader of Disaster Avoidance Experts, the author of Never Go With Your Gut and a couple of other books. You can learn more about him at his website, which is disasteravoidanceexperts .com. And you can learn more about us, about the National Center for the Middle Market at our website, middlemarketcenter .org. Thank you so much for listening to The Market That Moves America.
Speaker: never miss a new episode. You can subscribe to the podcast on iTunes, Stitcher, Google Play, or wherever you get your podcasts. Or you can subscribe and learn more about us at our website, which as I said is middlemarketcenter .org. Thanks a lot.
