There is no pill for this recession and its economic uncertainties, so stock up on knowledge, too.
My first two HRTools.com Insights introduced research-based concepts that business executives can use to stock their executive toolboxes: (1) knowledge management and (2) decision theory. Business forecasters and analysts predict that after this economy starts to recover, the American business scene won’t look the same as it did before.
Any business executive I know wants to make the wisest decisions possible. Wise decisions are usually best accomplished by tapping into a solid supply of knowledge.
In academia, which is my vocation, we strive to serve the general good by preparing students for leadership. Leadership, of course, involves making wise decisions.
Isn’t it a good thing, too, that we can learn from others’ mistakes or misguided human tendencies? If executives want to avoid getting tripped up in the area of decision theory, here are some points they may want to consider:
- First of all, business executives and leaders should not overly rely on decision theory and think that the principles will always provide them with solid answers. Anytime we put human beings in the mix, we can find ourselves with an imperfect model and outcome. Humans are fallible.
- To that point, marketing and other behavioral researchers study a concept known as the endowment effect. This effect comes across as something like this: “Well, I’ve already poured money into this project; maybe if I pour some more money into it, the problems will be fixed—those problems that surfaced simply because I didn’t doubt what could happen.”
- Human beings also have a tendency to engage in what we call selective memory, which can lead to a sense of false confidence. Corporations have people who engage in this behavior quite frequently. For instance, they may roll out a product, or they will do something successfully, and they think that those same actions and results can be repeated over and over again. This tendency is almost something similar to superstitious type behaviors.
- Discounting decision theory principles due to a perceived lack of understanding. Some executives completely stay away from these tools, discounting them, saying they have no value. I tend to see executives fall in one category or the other. Although most of those who tend to discount decision theory really are using the theory, they just do it on the back of an envelope or they believe that their experience level is such that they don’t really need to sit down and visualize the tool or decision space. So they get maybe a little lax, and that is understandable. If you’re a CEO and you’re running a company of 300,000 people, you can be imbued with the sense of certainty that just doesn’t exist. I’m not criticizing—they have a tough job—but trust me, they’re human beings like everybody else and they can make some rough decisions.
I’ll give you an example to help illustrate my points.
Let’s say that we’re in the midst of this financial crisis, which is an economic crisis of a proportion we’ve never seen. Rewind back to the fall of 2008. We saw a financial institution that was about to fail and the players from the Federal Reserve System and the U.S. Treasury reacted by attempting to determine: Do we let this company ‘die’ or do we keep it afloat?
In my opinion, they made a catastrophic decision by allowing it to die. Apparently they didn’t realize the ripple effect and havoc it would create within the financial systems. In a sense, they chose to gamble the U.S. economy rather than deal with the potential criticisms that they, no doubt, would have received if $50 billion were pumped in as a rescue attempt.
So the question is: Do we risk an entire national economy—meaning dollars in the multi-millions, billions, or 15 trillion amounts—whatever the unfathomable number versus the $50 billion, as referenced above? As it was, one can only assume that these major federal players were sensitive to political criticisms, so they allowed this major financial institution to die.
It’s impossible to think about America not being open for business, and many lessons will be learned from this recent economic crisis. Decision theory provides an excellent model from which to start. We all can stand to see some wiser decisions being made going forward.