May 2013Leadership

Making Strategic Decisions: Do You Have What It Takes?

strategic-decisions

Fact: Each year, over four million babies born in developing countries die within their first month of life. For many of these infants, temperature regulation is a key issue.

Problem: How can we provide incubators, which can cost thousands of dollars and rely on electricity, for as many of those babies as possible?

“Wrong!” notes Kathy Pearson, a Learning Director at Wharton Executive Education. “It’s a classic example of solving the wrong problem, one that crushes innovation and leads to bad outcomes. Focusing on ‘the way we’ve always done it’ — in this case solving temperature regulation problems with incubators — isn’t going to get good results. You’re not going to be able to provide enough incubators to reach enough babies. They’re expensive, and they require a steady stream of electricity.”

Pearson says the problem illustrates a cognitive bias, discovered through research in behavioral economics and psychology, that affects many strategic organizational decisions. “It’s a question of framing. The decision about how to provide incubators doesn’t take into account that there could be other ways of maintaining babies’ temperatures. It sees the problem through just one ‘frame,’ namely that incubators are the solution to the problem. Framing and other biases limit thinking and lead to less-than-optimal decisions.”

In The Strategic Decision-Making Mindset, a new program offered by Wharton Executive Education, Pearson helps executives identify and avoid these biases to make sounder, more long-term decisions. “Initially in your career, you get rewarded for getting things done. The emphasis is on analytics, short-term thinking, and management. In many ways, ‘business as usual’ can work for tactical decisions. But you progress to a level where you have to start thinking long-term. And that’s when I see a real split in talent — some people just don’t recognize that they need a different set of skills and behaviors. Those who can wear both hats well have the most success.”

Pearson stresses that those skills and behaviors can be learned, but you have to start by recognizing just how flawed your decision-making may be. “On the first day of the program, we start with a session on biases — what they are and how they affect you as an individual decision maker. What exactly is getting in your way when you need to make a strategic decision?

“On the second day, we look at biases in terms of the organization. Culture can really encourage and exacerbate the effects of a bias like Overconfidence. A great example is an organization that tells you to project your numbers ten years out. It’s a useless exercise. Who knows what your organization, or your industry, or the global economy will look like in a decade? Requesting a ten-year-plan indicates the belief that we think we know a lot more than we really do. It dampens the possibility of adaptability in decision-making. The culture in this case amplifies the effects of the overconfidence bias.”

For leaders, recognizing and then mitigating the effects of cognitive biases is critical. “Decisions are at the heart of what companies do,” says Pearson, “and the need to make solid ones that take ambiguity, complexity, and uncertainty into account has never been greater.”

And how was the incubator problem solved? Pearson explains, “I heard about this solution from Penn Medicine’s Innovation Center: once the problem was framed properly, a nonprofit designed a $200 infant sleeping bag made with a special material that helps retain body heat for up to six hours.” The Embrace Infant Warmer is donated to other NGOs in China, Uganda, India, and other countries.