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Thinking fast and slow: How we really make executive decisions

Last year I wrote a couple of blog posts about “Thinking fast and slow with strategy” that became some of my most visited posts.  The posts were inspired by the book by Daniel Kanhemann, “Thinking Fast and Slow”.   I strongly recommend you get a copy and read it if you haven’t already,

Daniel Kahneman won a Nobel prize for his work on how we think and make decisions. I found it really difficult not to read his book without thinking about all the decisions I have seen being made in executive suites and board rooms during my time working in strategy (and performance).  It made me read it slowly.

The great insight he brings is that we have two systems for making decisions as humans.  The fast system (system 1) deals with our day to day decisions and we almost don’t notice how it makes those decisions.  The slow system (System 2) is how we think we work, but in reality does not always kick in as expected.  As a consequence we make lots of decisions using our fast system, and circumstances can cause those decisions to be wrong.

Decisions based on similar situations

For instance, we use make decisions based on what appear to have been similar decisions in the past, even though a closer look would reveal that they are not at all similar.  We also substitute one problem for another, even though they are not similar (wanting KPIs, when you really have to clarify the strategy first, is a good example of this).  This is called a substitution heuristic.  We are also biased by simple comparisons, so when asked to guess a price we are influenced by random numbers that we are given, even though we know they are random and unrelated.  We make leaps of assumptions about how people might behave or what they might do, when statistically, the assumptions are complete nonsense. Around 150 types of error have been identified.

Decisions influenced by when we make it

I have been reading other psychologists who say that our judgement is also influenced by simple things like recent experience and blood sugar levels.  If asked to consider a project, and a recent task has gone well, this one also seems easy.  The same task, after retrieving thoughts of a project that went badly, will be seen as more difficult.  It is obvious when you describe it but, in the moment of decision, how aware are we that we are making these adjustments and introducing these biases.

Place all of this alongside the explosion of ‘big data’ that we have for decision making, and we can see the potential for decisions to become poorer, rather than improving.

I strongly recommend you have a read through the book; and read it slowly.  It is full of lovely examples that you have to think about as you read, each of which causes you to recognise the traps we fall into. Alternatively, keep an eye out my blog for articles relating the book’s material to how we formulate strategy and how we can improve our decision making.

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