The McKinsey Quarterly has an interesting piece titled “Hidden Flaws in Strategy”, authored by Charles Roxburgh. What I like about this article is that it forces one to think about your blind spot, and provide solutions on how to overcome your own bias. A blind spot is well, very self-explanatory, which is why I think that’s just all the more reason why people, especially those who do any kind of strategy, should read this well put together article.
I’ll sum up some of the key takeaways to me, but reading the original piece of McKinsey is highly recommended.
Here are the common strategy flaws.
Flaw 1: Overconfidence
Our brains are naturally wired to make us overconfidence. This can be a good thing, because otherwise no one in their right mind would want to launch a new startup. However, we hurt ourselves when we try to make accurate estimates. Given a test question like “How heavy is a fully laden 747?” where participants are asked to give an answer where they were 90% confident, most people would rather be precisely wrong than be vaguely right.
Lesson learned: Be skeptical of strategies premised on certainty, and (duh) give yourself some wiggle room.
Flaw 2: Mental Accounting
Richard Thaler, a theorist in behavioural finance named the concept of mental accounting, defined as “the inclination to categorize and treat money differently depending on where it comes from, where it is kept, and how it is spent.” Some examples of mental accounting in the boardroom:
- imposing caps on core business while throwing money at a startup
- writing off money spent with conveniently created categories such as “revenue-investment spend” or “strategic investment”
Lesson learned: Don’t be so quick to throw away “so what if we throw it away” money. Eval potential investment through the standard scrutiny process, regardless of how the money fell into your lap.
Flaw 3: Status quo bias
An experiment conducted by Samuelson and Zeckhauser discovered that when students were asked how they would invest a hypothetical inheritance of millions of dollars, they adopted a “let’s leave things where they are” approach. That is, if the inheritance was already in high-risk high-yield stocks, it would be left as is. If the inheritence was already in low-risk low-return bonds, it would also be left as is. They opted not to rebalance the allocation in this hypothetical portfolio, even if it wasn’t in accordance to their risk preference.
The explanation is that people are more concerned about the fear of loss more than they are excited by the prospect of getting more. That’s the status quo. That’s what makes entrepreneurs special–they are not the status quo.
The other explanation is the endowment bias. Thaler discovered in an experiment with Cornell students that they wouldn’t pay more than $2.75 for mug with a Cornell imprint, but if they were given one, they wouldn’t sell the same mug away for less than $5.25–did the free market suddenly decide that the same mug has more value when it was already in someone’s possession when the same mug (a brand new one available for purchase) would be worth less? I think not.
While conservatism can be a strategic asset, it is important to distinguish between a status-quo option that is genuinely the right thing to do vs. one that just “feels safe” because of our innate bias.
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