May 2011Strategy

Decision Traps: Small Changes in Thinking Yield Big Payoffs

Decision Traps

Sweeping overhauls make news, but often it's incremental changes that bring results. Instead of adopting a radically different management style, or restructuring a department, Wharton's Aresty Institute of Executive Education Fellow Roch Parayre suggests modifying the way you think.

"Our thoughts, and particularly the mental models we use to analyze and draw conclusions with, absolutely hold us back," he notes. "We tend to go with our gut instincts. And even when we pull together some information to analyze, it's often not the right information. Or we spend our time focused on solving what we think is the problem, only to find out it was a symptom. It's these kinds of decision traps that lead to poor outcomes.

"But," says Parayre, who is co-academic director of Growing the Top Line: Full-Spectrum Innovation Strategies, "if you approach decision-making in a more systematic way, using some templates or tools to help structure the innovation conversation and innovation decisions, you will have more successes. In the program, we provide tools from a variety of different perspectives, both individual mental models as well as organizational tools and decision aids. Using them to make small changes, over the long run, can really compound into big competitive advantages."

Frame the Problem

Parayre identifies two specific thought processes to focus on. "First, how are you framing the problem? We have a tendency to see what we want to see. There are mental models at work, and they're based on assumptions we believe are correct. The key is that we're not even aware of these assumptions and models — and you can't let go of them or even modify them when you don't realize they're there.

"A tech company, for example, believes everyone is going to go mobile. They're basing critical innovation decisions on that assumption, which is based on past trends that may not be true going forward. To drive innovation strategy in a better direction, that assumption needs to be recognized and challenged. Play a 'what if' game — identify the assumption, and ask what would happen if it wasn't true. Are you prepared for that outcome?"

Gather the Right Information

Parayre asks participants in Full-Spectrum Innovation Strategies to "mine and mind" the periphery. "Too many organizations don't do this. But what's on the periphery today could be in the crosshairs in a couple of years. Good decisions should be 'outside in,' based on where the external world is going. Allocate resources based on that reality, what's going on in the periphery. Learn from other industries and other countries by keeping an eye on a much broader field.

"If you're only focusing on what's happening in your market right now, and innovating for today's market, you are missing opportunities. It's when you innovate for tomorrow's market that a breakthrough occurs. The great Canadian hockey player Wayne Gretsky understood the importance of anticipating and looking to the periphery: 'I skate to where the puck is going to be as opposed to where the puck is.'"

It's also difficult to get the right knowledge when you see certainty where you shouldn't. "The research is overwhelming," says Parayre. "We are overconfident creatures. We significantly underestimate uncertainty as a species when we make decisions. You can argue that the financial crisis of three years ago was a result of overconfidence. Decisions were made by relying on models based on 20 years of historical data. Had firms on Wall Street, for example, used historical data that had the Great Depression in it, the volatility in their models would have been greater and different decisions would have been made. People rationalize that the Great Depression was an outlier, but there's a whole bunch of outliers out there and when you take them together, they can't be discounted."

Ultimately, small changes, such as questioning your assumptions and mining and minding the periphery, can result in large gains. Parayre explains using a favorite baseball analogy: "If you're a lifetime 300 hitter [an average of three base hits for every ten times at bat], you're a Hall of Famer. If you're a lifetime 290 hitter, you're just a solid player. What separates them is about one hit per month over the course of a career. By becoming a 300 innovation hitter over the long run, you can significantly outperform a lifetime 290 hitter."