Tag: Organizations

Richard Zeckhauser on Improving our Ability to Make Decisions

Richard Zeckhauser, aka Mr. Probability, was recently interviewed in Outlook Business.

Zeckhauser is a champion Bridge player and the Frank Ramsey professor of political economy at Harvard University.

When asked how companies can prevent overpaying for acquisition, Zeckhauser responded:

There is this tremendous optimism bias built into acquisitions. Synergies in my experience are frequently overstated. If I were looking at a large merger, I would hire a team in my corporation to present arguments to the board as to why we should not do it. The idea is to have a countervailing team to poke holes in the logic. Organisations have this tremendous tendency to get behind the boss and do what he thinks should be done, but you have to get away from that and motivate people to bring to the table something contrary to what is being said.

That bit of wisdom applies to more than just corporate acquisitions.

The problem is that people often blindly follow the boss and what s/he thinks should be done. The Hippo Problem. — The Highest Paid Person’s Opinion carries the day even if they are wrong. They are, after all, the authority figure.

Stanley Milgram demonstrated our obedience to authority through a series of experiments. Milgram summarized his most famous experiment in a 1974 article, The Perils of Obedience, writing:

I set up a simple experiment at Yale University to test how much pain an ordinary citizen would inflict on another person simply because he was ordered to by an experimental scientist. Stark authority was pitted against the subjects’ [participants’] strongest moral imperatives against hurting others, and, with the subjects’ [participants’] ears ringing with the screams of the victims, authority won more often than not. The extreme willingness of adults to go to almost any lengths on the command of an authority constitutes the chief finding of the study and the fact most urgently demanding explanation.

Ordinary people, simply doing their jobs, and without any particular hostility on their part, can become agents in a terrible destructive process. Moreover, even when the destructive effects of their work become patently clear, and they are asked to carry out actions incompatible with fundamental standards of morality, relatively few people have the resources needed to resist authority

Zeckhauser was also asked how we can make better decisions?

One part of decision-making is about how to place your priorities. Let me tell you what I said to a group of investment professionals recently. They were making investments and were being introduced to five fund managers. I said, “You have $50 million to invest and you have five potential managers; that does not mean you have to give $10 million to each of these managers. If you really think that manager A is much better, you should probably give him 25 and the others much smaller amounts.” Then, you improve your odds.

Here’s another example out of what I see in everyday life. You get 50 e-mails during the day and you answer 30 of them. On the one that you answer the most, you take 3 minutes. In all the others, you take 45 seconds. You should take 25 minutes to answer the one that is important, but you don’t. Once that is pointed out to you, you will say that is really obvious. In other words, you should decide what is really important and make your choices accordingly.

The other thing is about distinguishing between various probabilities. I think of making decisions the way I play tennis. I have taken many tennis lessons and my trainer always tells me the same three or four things. Keep your eye on the ball, get into position, swing your racquet back and swing the ball. I pay him $75 to tell me “keep your eye on the ball” and he tells me the same thing over and over again because the natural tendency when you are playing tennis is to take your eye off the ball. The natural tendency when you are thinking about probabilistic situations is to marginalise probabilities — treat 1%, 5%, 10% and 15% probabilities all as low probabilities. I think it is worth your while before you take a decision to figure out whether it is going to be 1%, 5%, 10% or 20%. And when it is worthwhile and when it is not. But most people don’t bother to do that.

I am writing a paper today where we start off talking about President Obama’s assessment of the likelihood that Osama bin Laden was in the hideout where we found him to be. He had a variety of assessments and he eventually concluded well it was 50% likely that we were going to go get him. Now, there is nothing magical about 50%. It might be that it is perfectly worthwhile to go and raid that compound if the probability is only 30%. And maybe it is not worthwhile even if it is 70%. Think about that. But people feel that 50% is magical and they don’t like to do things where they don’t have 50% odds. I know that is not a good idea, so I am willing to make some bets where you say it is 20% likely to work but you get a big pay-off if it works, and only has a small cost if it does not. I will take that gamble. Most successful investments in new companies are where the odds are against you but, if you succeed, you will succeed in a big way.

To improve your ability to make better decisions and think probabilistically Zeckhauser recommends reading Thinking, Fast and Slow. If you’re looking for something less mainstream but equally insightful try Max Bazerman’s Judgment in Managerial Decision Making, which has been a favorite of mine for years.

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Still curious? Zeckhauser is the author of a fascinating paper: Investing in the Unknown and Unknowable.

Matthew Crawford: “We’re not as free and independent as we thought.”

“We have a generation of students that can answer
questions on standardized tests, know factoids,
but they can’t do anything.”

— Jim Aschwanden

***

Despite the metrification of the modern workplace, we still lack for objective standards that lack ambiguity in terms of credit and blame. The complexity of work generally means that one person doesn’t work alone anymore. They are part of a team. This rise of teamwork makes it difficult to trace individual responsibility.

This is not unique to employees. In Shop Class as Soulcraft: An Inquiry into the Value of Work, philosopher, and mechanic Matthew Crawford writes:

Managers themselves inhabit a bewildering psychic landscape, and are made anxious by the vague imperatives they must answer to. The college student interviews for a job as a knowledge worker, and finds that the corporate recruiter never asks him about his grades and doesn’t care what he majored in. He senses that what is demanded of him is not knowledge but rather that he project a certain kind of personality, an affable complaisance. Is all his hard work in school somehow just for show—his ticket to a Potemkin meritocracy? There seems to be a mismatch between form and content, and a growing sense that the official story we’ve been telling ourselves about work is somehow false.

There is more:

A washing machine, for example, surely exists to serve our needs, but in contending with one that is broken, you have to ask what it needs. At such a moment, technology is no longer a means by which our mastery of the world is extended, but an affront to our usual self-absorption. Constantly seeking self-affirmation, the narcissist views everything as an extension of his will, and therefore has only a tenuous grasp on the world of objects as something independent. He is prone to magical thinking and delusions of omnipotence. A repairman, on the other hand, puts himself in the service of others, and fixes the things they depend on. His relationship to objects enacts a more solid sort of command, based on real understanding. For this very reason, his work also chastens the easy fantasy of mastery that permeates modern culture. The repairman has to begin each job by getting outside his own head and noticing things; he has to look carefully and listen to the ailing machine.

The repairman is called in when the smooth operation of our world has been disrupted, and at such moments our dependence on things normally taken for granted (for example, a toilet that flushes) is brought to vivid awareness. For this very reason, the repairman’s presence may make the narcissist uncomfortable. The problem isn’t so much that he is dirty, or uncouth. Rather, he seems to pose a challenge to our self-understanding that is somehow fundamental. We’re not as free and independent as we thought.

Open-plan Offices Suck — Privacy Makes Us Productive

Working alone is out. Organizations, schools, and culture are in the thrall of what Susan Cain calls “the new groupthink,” which holds that creativity derives from our gregariousness.

“Most of us,” she writes, “now work in teams, in offices without walls, for managers who prize people skills above all. Lone geniuses are out. Collaboration is in.” But there is a problem with this view: Research suggests people are more creative when they enjoy privacy and freedom from interruption.

In his memoir, Steve Wozniak offers this guidance to aspiring inventors:

Most inventors and engineers I’ve met are like me … they live in their heads. They’re almost like artists. In fact, the very best of them are artists. And artists work best alone …. I’m going to give you some advice that might be hard to take. That advice is: Work alone… Not on a committee. Not on a team.

“And yet,” Cain writes, “The New Groupthink has overtaken our workplaces, our schools and our religious institutions. Anyone who has ever needed noise-canceling headphones in her own office or marked an online calendar with a fake meeting in order to escape yet another real one knows what I’m talking about.”

Open-plan offices

Studies show that open-plan offices make workers hostile, insecure and distracted. They’re also more likely to suffer from high blood pressure, stress, the flu and exhaustion. And people whose work is interrupted make 50 percent more mistakes and take twice as long to finish it.

Privacy also makes us productive.

In a fascinating study known as the Coding War Games, consultants Tom DeMarco and Timothy Lister compared the work of more than 600 computer programmers at 92 companies. They found that people from the same companies performed at roughly the same level — but that there was an enormous performance gap between organizations. What distinguished programmers at the top-performing companies wasn’t greater experience or better pay. It was how much privacy, personal workspace and freedom from interruption they enjoyed. Sixty-two percent of the best performers said their workspace was sufficiently private compared with only 19 percent of the worst performers. Seventy-six percent of the worst programmers but only 38 percent of the best said that they were often interrupted needlessly.

Solitude can even help us learn.

According to research on expert performance by the psychologist Anders Ericsson, the best way to master a field is to work on the task that’s most demanding for you personally. And often the best way to do this is alone. Only then, Mr. Ericsson told me, can you “go directly to the part that’s challenging to you. If you want to improve, you have to be the one who generates the move. Imagine a group class — you’re the one generating the move only a small percentage of the time.”

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The Decision-Making Flaw in Powerful People

The paper below finds a link between having a sense of power and ignoring the advice of others.

The authors argue that power increases confidence, which can lead to an excessive belief in one’s own judgment.

In a sense, powerful people think they are right because of their place in the organization, not because of their knowledge.

This, of course, leads to flawed decisions.

From Strategy+Business:

Previous research has shown that the quality of decision making declines when people hew too much to their own beliefs and discount too readily the advice of others; outside information helps “average out” the distortions that can result when people give a great deal of weight to their own opinions and first impressions. This paper is among the first to examine whether power — defined as an individual’s “capacity to influence others, stemming in part from his or her control over resources, rewards, or punishments” — reduces or increases a person’s willingness to heed advice.

… In addition to confirming the previous experiments’ finding that more powerful people were less likely to take advice and were more likely to have high confidence in their answers, this final experiment showed that high-power participants were less accurate in their answers than low-power participants. By calculating the mean deviation between respondents’ initial estimates and the true answers, the researchers showed that low-power participants came significantly closer in their final estimates to the real tuition numbers because they “averaged” their initial guesses with the input from the advisors.

The researchers propose that their findings have troubling implications for organizations — and that power could negatively affect not just advice taking, but also an individual’s approach to seeking help or accepting performance feedback. But because power and confidence are so interrelated, there are ways to mitigate the problem. By “directly addressing the inflated confidence levels of powerful individuals,” the researchers write, “organizations may be able to help people with power take (and/or seek) advice when it is valuable to do so.”

For one thing, organizations could formally include advice gathering at the earliest stages of the decision-making process, before powerful individuals have a chance to form their own opinions. Encouraging leaders to refrain from commenting on decisions publicly could also keep them from feeling wedded to a particular point of view.

Bottom Line:
Powerful people are less likely to take advice from others, in large part because they have high confidence in their own judgment and don’t feel the need to incorporate outside views. By not factoring in others’ advice, however, people in power risk making flawed decisions.

Abstract:

Incorporating input from others can enhance decision quality, yet often people do not effectively utilize advice. We propose that greater power increases the propensity to discount advice, and that a key mechanism explaining this effect is elevated confidence in one’s judgment. We investigate the relationships across four studies: a field survey where working professionals rated their own power and confidence and were rated by coworkers on their level of advice taking; an advice taking task where power and confidence were self-reported; and two advice taking experiments where power was manipulated. Results consistently showed a negative relationship between power and advice taking, and evidence of mediation through confidence. The fourth study also revealed that higher power participants were less accurate in their final judgments. Power can thus exacerbate the tendency for people to overweight their own initial judgment, such that the most powerful decision makers can also be the least accurate.

Source: Kelly E. See, Elizabeth W. Morrison, Naomi B. Rothman, Jack B. Soll, The detrimental effects of power on confidence, advice taking, and accuracy, Organizational Behavior and Human Decision Processes

Promoting People In Organizations

In their 1978 paper Performance Sampling in Social Matches, researchers March and March discussed the implications of performance sampling for understanding careers in organizations. They came to some interesting conclusions with implications for those of us working in organizations.

Considerable evidence exists documenting that individuals confronted with problems requiring the estimation of proportions act as though sample size were substantially irrelevant to the reliability of their estimates. We do this in hiring all the time. Yet we know that sample size matters.

On how this cognitive bias affects hiring, March and March offer some good insights including the false record effect, the hero effect, the disappointment affect.

False Record Effect

A group of managers of identical (moderate) ability will show considerable variation in their performance records in the short run. Some will be found at one end of the distribution and will be viewed as outstanding; others will be at the other end and will be viewed as ineffective. The longer a manager stays in a job, the less the probable difference between the observed record of performance and actual ability. Time on the job increased the expected sample of observations, reduced expected sampling error, and thus reduced the chance that the manager (of moderate ability) will either be promoted or exit.

Hero Effect

Within a group of managers of varying abilities, the faster the rate of promotion, the less likely it is to be justified. Performance records are produced by a combination of underlying ability and sampling variation. Managers who have good records are more likely to have high ability than managers who have poor records, but the reliability of the differentiation is small when records are short.

Disappointment Effect

On the average, new managers will be a disappointment. The performance records by which managers are evaluated are subject to sampling error. Since a manager is promoted to a new job on the basis of a good previous record, the proportion of promoted managers whose past records are better than their abilities will be greater than the proportion whose past records are poorer. As a result, on the average, managers will do less well in their new jobs than they did in their old ones, and observers will come to believe that higher level jobs are more difficult than lower level ones, even if they are not.

…The present results reinforce the idea that indistinguishability among managers is a joint property of the individuals being evaluated and the process by which they are evaluated. Performance sampling models show how careers may be the consequences of erroneous interpretations of variations in performance produced by equivalent managers. But they also indicate that the same pattern of careers could be the consequence of unreliable evaluation of managers who do, in fact, differ, or of managers who do, in fact, learn over the course of their experience.

But hold on a second before you stop promoting new managers (who, by definition, have a limited sample size).

I’m not sure that sample size alone is the right way to think about this.

Consider two people: Manager A and Manager B who are up for promotion. Manager A has 10 years of experience and is an “all-star” (that is great performance with little variation in observations). Manager B, on the other hand, has only 5 years of experience but has shown a lot of variance in performance.

If you had to hire someone you’d likely pick A. But it’s important not to misinterpret the results of March and March and dig a little deeper.

What if we add one more variable to our two managers.

Manager A’s job has been “easy” whereas Manager B took a very “tough” assignment.

With this in mind, it seems reasonable to conclude that Manager B’s variance in performance could be explained by the difficulty of their task. This could also explain the lack of variance in Manager A’s performance.

Some jobs are tougher than others.

If you don’t factor in degree-of-difficulty you’re missing something big and sending a message to your workforce that discourages people from taking difficult assignments.

The importance of measuring performance over a meaningful sample size is the key to distinguishing between luck and skill. When in doubt go with the person that’s excelled with more variance in difficulty.

6 Must-Read Books To Help Navigate the Workplace

The challenges of climbing the corporate ladder are both fascinating and fluid.

Whether you’re looking to improve your ability to influence or avoid some common pitfalls these books are a great place to start:

1. Corporate Confidential: 50 Secrets Your Company Doesn’t Want You to Know—and What to Do About Them

“Your number one job is to keep your job,” Shapiro, a former human resources executive, writes in this informed and disillusioned take on the corporate life, so don’t ever “publicly complain, disagree or express a negative view,” take more than one week of vacation at a time, “volunteer,” or “tell anyone what you’re doing.” When asked to do anything, acceptable responses are “sure” and “of course,” always accompanied by a smile. Your dress style “should match as closely as possible the style of those at the top.” Don’t make friends at work-it’s “deadly” to want to be liked. The book reads like a guerilla survival manual for the employment jungle written by a hardened survivor.

2. Power: Why Some People Have It and Others Don’t

Pfeffer claims that intelligence, performance, and likeability alone are not the key to moving up in an organization; instead, he asserts, self promotion, building relationships, cultivating a reputation for control and authority, and perfecting a powerful demeanor are vital drivers of advancement and success.

3. Rework

Seth Godin sums it up best: “This book is short, fast, sharp and ready to make a difference. It takes no prisoners, spares no quarter, and gives you no place to hide, all at the same time….I can’t imagine what possible excuse you can dream up for not buying this book for every single person you work with, right now.”

4. Enchantment: The Art of Changing Hearts, Minds, and Actions

This book will help you improve your influence. After all, the best ideas sometimes need a little psychological help.

5. What Got You Here Won’t Get You There: How Successful People Become Even More Successful

Goldsmith, pinpoints 20 bad habits that stifle already successful careers as well as personal goals like succeeding in marriage or as a parent. Most are common behavioral problems, such as speaking when angry, which even the author is prone to do when dealing with a teenage daughter’s belly ring. Though Goldsmith deals with touchy-feely material more typical of a self-help book—such as learning to listen or letting go of the past—his approach to curing self-destructive behavior is much harder-edged. For instance, he does not suggest sensitivity training for those prone to voicing morale-deflating sarcasm. His advice is to stop doing it. To stimulate behavior change, he suggests imposing fines (e.g., $10 for each infraction), asserting that monetary penalties can yield results by lunchtime. While Goldsmith’s advice applies to everyone, the highly successful audience he targets may be the least likely to seek out his book without a direct order from someone higher up. As he points out, they are apt to attribute their success to their bad behavior. Still, that may allow the less successful to gain ground by improving their people skills first.

6. Managing With Power: Politics and Influence in Organizations

The big problem facing managers and their organizations today is one of implementation – how to get things done in a timely and effective way. Problems of implementation are really issues of how to influence behavior, change the course of events, overcome resistance, and get people to do things they would not otherwise do. In a word, power. “Managing with Power” provides an in-depth look at the role of power and influence in organizations. Pfeffer shows convincingly that its effective use is an essential component of strong leadership. With vivid examples, he makes a compelling case for the necessity of power in mobilizing the political support and resources to get things done in any organization. He provides an intriguing look at the personal attributes – such as flexibility, stamina, and a high tolerance for conflict – and the structural factors – such as control of resources, access to information, and formal authority – that can help managers advance organizational goals and achieve individual success.*