The Dynamics of Data and Human Behavior in Decision-Making
What CFOs should know about biases in making decisions that matter
|Posted by Steven Ehrenhalt, Principal, Deloitte Consulting LLP|
|Posted by Laura Bede, Senior Manager, Deloitte Touche Tohmatsu Limited|
The science of decision-making -- behavioral economics -- is not new, but its importance is growing as the velocity of decision-making increases for organizations of all kinds. Behavioral economics draws upon insights from neurology, psychology, economics, and other disciplines to better understand how human beings make decisions. Perhaps the greatest irony in the science of behavioral economics is that it demonstrates how the mechanisms of human frailty are at play.
The complexity of the digital age and the associated flurry of data have served to make decision-making more complicated than ever. Understanding human biases, however, can help improve the quality of decisions. For CFOs, who are responsible for guiding organizations through some of the most difficult and critical business decisions, knowing where these biases can occur may help avoid blind spots:
- Individual Level: These personal behavioral biases result from deep psychological dimensions that can result in a pattern of poor judgment. They include such biases as overconfidence.
- Group Level: At the group level, pitfalls generally involve a lack of clarity around decision rights. Often, teams move forward on important decisions without explicit agreement on the “who, what, and how” of decision-making.
- Organizational Level: At the business level, decision effectiveness is closely tied to execution. Access to fact-based information based on defined data and a transparent approach to communicating and implementing decisions is important.
Many kinds of biases traverse these levels and can bring with them potential disruption of effective decision-making. While some decisions involve only one level, many involve all three. Implementing effective pricing strategies, for example, requires the assessment of data from various competitors. Setting appropriate hiring targets requires acceptable estimates for growth. And the act of making new capital investments is dependent upon assumptions about timing, markets, and the cost of capital.
Knowing where to look is the first step in uncovering and understanding biases that can become barriers to fact-based decision making. Once biases are understood, the business can adopt an “eyes wide open” approach to looking for these biases across the organization’s important decisions. While each business is different, it can – and should -- construct a working list of decisions that matter. In most cases, these decisions are those where people can act more wisely with the right decision-making infrastructure in place, and those that are important enough to seriously impact value creation. The next step is to identify how input from CFOs and CIOs can help reduce biases and see through blind spots.
Has your organization developed a list of decisions that matter? Have you identified where and how biases can create blind spots to effective decision-making?
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