We are all sus­cep­ti­ble to cog­ni­tive bi­ases, but some of our bi­ases are par­tic­u­larly prob­lem­atic when deal­ing with strate­gic de­ci­sion-mak­ing and in­no­va­tions, writes Suvi Nenonen.

NZ Business - - CONTENTS - As­so­ciate Pro­fes­sor Suvi Nenonen works at the Univer­sity of Auck­land Busi­ness School’s Grad­u­ate School of Man­age­ment and teaches in the MBA pro­grammes. Her re­search fo­cuses on busi­ness model in­no­va­tion and mar­ket in­no­va­tion.

Ev­ery strate­gist is bi­ased – and so are you. By Suvi Nenonen.

WE ALL LIKE to think that we are bet­ter than av­er­age driv­ers. And par­tic­u­larly we like to ap­plaud our­selves as solid, ra­tio­nal thinkers.

Un­for­tu­nately, science does not agree with these no­tions. We are all sus­cep­ti­ble to cog­ni­tive bi­ases, ir­re­spec­tive of our IQ score or the num­ber of de­grees we have ac­quired. While heuris­tics and jumping to con­clu­sions may have kept our an­ces­tors alive, phys­i­o­log­i­cally-speak­ing we still have the same “cave­man” brain – and in busi­ness it can be our down­fall.

The study of cog­ni­tive bi­ases is deep, wide and es­tab­lished; vo­lu­mi­nous enough to fill a book­case. The fol­low­ing ones, how­ever, are par­tic­u­larly prob­lem­atic when deal­ing with strate­gic de­ci­sion-mak­ing and in­no­va­tions: • Sunk cost fal­lacy. Con­tin­u­ing to in­vest in a ven­ture that clearly has odds against it be­cause “we have in­vested too much to walk away now.” Un­for­tu­nately, the fact that you have spent a lot of money and time doesn't mag­i­cally trans­form a turkey into an ea­gle, nor im­prove the prob­a­bil­i­ties of suc­cess. • Sta­tus quo bias. Ninety-nine per­cent of all busi­ness cases com­pare the new ini­tia­tive against the cur­rent state – and the cur­rent state is al­most al­ways as­sumed to re­main sta­ble in the fu­ture. But in fact, in most cases the ‘cur­rent state' is just that: cur­rent. And look­ing for­ward, this state is de­te­ri­o­rat­ing, sug­gest­ing that stand­ing still means los­ing rel­a­tive com­pet­i­tive­ness. • Cog­ni­tive ease. Ever pre­sented some­thing com­plex – but rock-solid – to your top man­age­ment and got­ten a luke­warm re­sponse, while your col­league's sim­ple but flawed pro­posal got stand­ing ova­tions? Cog­ni­tive ease is play­ing its tricks again. This bias makes us favour sim­ple and fa­mil­iar solutions over com­plex and truly novel ones, as the for­mer group is eas­ier to un­der­stand.

Un­for­tu­nately, no-one can ever free them­selves com­pletely from cog­ni­tive bi­ases or the use of heuris­tics; it is part and par­cel of be­ing hu­man.

But be­ing aware of the most com­mon bi­ases helps first to spot them and then to ex­pose them. So, the next time you are in a strat­egy re­treat and some­one makes an ar­gu­ment for throw­ing good money af­ter bad, you can call “sunk cost fal­lacy” and in­vite a more thor­ough dis­cus­sion about the prob­a­bil­i­ties of suc­cess.


Daniel Kah­ne­man has called op­ti­mism bias – be­liev­ing that you are not go­ing to fail even though oth­ers have – as the most per­va­sive one of all cog­ni­tive bi­ases. How­ever, this par­tic­u­lar bias is the magic in­gre­di­ent that makes us in­no­va­tive and en­tre­pre­neur­ial.

Just think of a so­ci­ety where ev­ery en­tre­pre­neur is per­fectly ra­tio­nal. No­body would start any­thing new, be­cause en­trepreneurs and man­agers would know that the odds are against them. So, even though on an in­di­vid­ual level op­ti­mism bias may have cat­a­strophic con­se­quences, on or­gan­i­sa­tional and so­ci­etal lev­els it is ab­so­lutely cru­cial for in­no­va­tion.

There­fore, in­no­va­tive com­pa­nies have to al­low – or even foster – op­ti­mism bias, while mit­i­gat­ing the associated risks by hav­ing a large port­fo­lio of devel­op­ment projects and a ro­bust fi­nan­cial con­trol.


On an in­di­vid­ual level, how­ever, you have to live with the knowl­edge that you are suf­fer­ing from a per­va­sive op­ti­mism bias, and still kick off your new ven­ture.

How to do that with­out de­vel­op­ing schizophre­nia? Af­ter you have called out sunk cost fal­lacy, sta­tus quo bias, and cog­ni­tive ease, con­duct a pre­mortem.

In a pre-mortem, you try to im­prove the qual­ity of your project plan by ask­ing a seem­ingly sim­ple ques­tion: “Imag­ine that we have ex­e­cuted this plan per­fectly, but the project has failed spec­tac­u­larly. Why?”

A proper pre-mortem helps to bal­ance your in­her­ent plan­ning fal­lacy (over­es­ti­mate ben­e­fits, un­der­es­ti­mate costs and time) – and thus to avoid hav­ing to do a post­mortem on your ini­tia­tive. For those in­ter­ested in cog­ni­tive bi­ases, please read Think­ing, Fast and Slow by Daniel Kah­ne­man. Daniel Kah­ne­man was awarded the 2002 No­bel Memo­rial Prize in Eco­nomic Sciences (with Ver­non L. Smith), and he is of­ten called the fa­ther of be­havioural eco­nom­ics.

Hu­man Re­sources man­agers and aca­demics know that de­vel­op­ing our peo­ple is one of the best ways to achieve com­pany ob­jec­tives and to cre­ate a com­pet­i­tive ad­van­tage.

Glob­ally, com­pa­nies re­alise that the ef­fort one puts into peo­ple devel­op­ment leads to bet­ter en­gage­ment, bet­ter pro­duc­tiv­ity, com­mit­ment and higher lev­els of staff re­ten­tion.

De­spite this, devel­op­ment is of­ten one of the first things to be cut dur­ing tough times. Devel­op­ment is all too of­ten seen as a cor­po­rate “ex­tra”.

Just when com­pa­nies need the best skills and the sharpest minds, some tend to cut back on the things most likely to help them trade through the chal­leng­ing con­di­tions.

And de­spite this be­ing a press­ing topic, rel­a­tively lit­tle is known about HR devel­op­ment prac­tices in New Zealand.

To find out more, the In­sti­tute of Man­age­ment New Zealand (IMNZ) com­mis­sioned MPOWER to study cor­po­rate ed­u­ca­tion fo­cus­ing on three key staff groups: ex­ec­u­tive/se­nior man­agers, mid­dle man­agers and ‘high po­ten­tials’ (those likely to as­sume a lead­er­ship role). Work­ing with lo­cal and in­ter­na­tional part­ners (such as Hen­ley Busi­ness School in the UK which has re­sults from 47 coun­tries) MPOWER com­piled in­for­ma­tion from re­spon­dents in New Zealand and Aus­tralia.

The New Zealand and wider Aus­tralasian re­spon­dents hailed from a wide range of po­si­tions, with ex­ec­u­tive/se­nior lead­ers best rep­re­sented at 29.8 per­cent and 30.3 per­cent re­spec­tively. Or­gan­i­sa­tions of all sizes and from a wide ar­ray of sec­tors were rep­re­sented.

Women formed a slight ma­jor­ity of the New Zealand re­spon­dents while the op­po­site was so for the com­bined dataset.

How­ever, fe­males were un­der­rep­re­sented in each of the key staff groups, par­tic­u­larly among ex­ec­u­tives/se­nior man­agers and high po­ten­tials, with key HR im­pli­ca­tions (e.g. for gen­der-aware suc­ces­sion plan­ning).


• Ma­jor chal­lenges fac­ing New Zealand and Aus­tralasian or­gan­i­sa­tions con­cern: ad­dress­ing tech­no­log­i­cal ad­vances (al­most half the re­spon­dents men­tioned this); the speed of change; cost man­age­ment; ma­jor re-or­gan­i­sa­tions; and suc­ces­sion plan­ning. Or­gan­i­sa­tional size had some bear­ing on the pri­or­ity of chal­lenges. • Linked to this, the most com­monly-cited peo­ple devel­op­ment ob­jec­tives for New Zealand and Aus­tralasian or­gan­i­sa­tions in 2016 were: tal­ent re­ten­tion; main­tain­ing and build­ing em­ployee en­gage­ment; equip­ping lead­ers to de­liver change. The same ob­jec­tives re-ap­peared for 2017. • In New Zealand and the re­gion, the top devel­op­ment pri­or­i­ties var­ied by and re­flected the role em­pha­sis of key staff groups (Fig­ure 1). • At least two-fifths of each staff group in New Zealand and Aus­tralasian work­places were con­sid­ered ‘very likely’ to be in­cluded in peo­ple devel­op­ment plans.


• In New Zealand, re­spon­dents in­di­cated that a con­sid­er­able ar­ray of learn­ing and devel­op­ment (L&D) meth­ods was ex­pected to be used this year, par­tic­u­larly: in­di­vid­ual coach­ing, peer-topeer ac­tiv­i­ties; team coach­ing; blended learn­ing; and in­di­vid­ual on­line learn­ing. The pat­tern was sim­i­lar for the com­bined dataset but at more con­ser­va­tive lev­els. • It was per­ceived that ex­ec­u­tive/se­nior man­agers in NZ and the re­gion would most pre­fer coach­ing, ex­pe­ri­en­tial L&D and blended learn­ing for­mats. For mid­dle man­agers, coach­ing was again the most favoured ap­proach but this time fol­lowed by blended learn­ing and class­room-based L&D. Coach­ing was also most favoured for high po­ten­tials, fol­lowed by blended learn­ing and ex­pe­ri­en­tial L&D. • New Zealand re­spon­dents were gen­er­ally pos­i­tive to­wards on­line L&D though just un­der half strongly agreed or agreed that it was not pos­si­ble to repli­cate class­room dy­nam­ics in an on­line en­vi­ron­ment. More than half (56.3 per­cent) agreed or strongly agreed that their or­gan­i­sa­tion was com­fort­able about in­creas­ing the ra­tio of on­line to face-to-face learn­ing, though 70.8 per­cent felt that it was suit­able for many but not all as­pects of lead­er­ship devel­op­ment. Two-thirds con­curred that on­line learn­ing was more cost ef­fec­tive than other devel­op­ment meth­ods. The re­sults for Aus­trala­sia were sim­i­lar. • Fol­low­ing ex­ec­u­tive devel­op­ment pro­grammes, re­spon­dents from both datasets re­ported that the fol­low­ing were most reg­u­larly used in their work­place: for­mal feed­back from the par­tic­i­pat­ing ex­ec­u­tive; a re­view of the ex­ec­u­tive’s KPIs; and a re­view of the KPIs for the ex­ec­u­tive’s team. • Some new ar­eas ad­dressed by the New Zealand and Aus­tralian sur­veys re­lated to or­gan­i­sa­tional ob­jec­tives and per­for­mance. The vast ma­jor­ity of New Zealand re­spon­dents (85.8 per­cent) felt that ex­ec­u­tive ed­u­ca­tion has at least some im­pact or rel­e­vance for at­tain­ing or­gan­i­sa­tional ob­jec­tives (22.9 per­cent felt that its im­pact was sig­nif­i­cant). Those most con­vinced of its im­pact stressed how it de­vel­oped think­ing, skills and be­havioural ap­proaches with which to re­spond to new sit­u­a­tions; en­cour­aged a cul­tural shift; sus­tained or­gan­i­sa­tional per­for­mance; and kept the or­gan­i­sa­tion ‘ahead’. Some felt that, with­out HR devel­op­ment, or­gan­i­sa­tions ‘with­ered’. In Aus­trala­sia, scep­tics of ex­ec­u­tive ed­u­ca­tion’s im­pact com­mented on the me­di­at­ing ef­fect of their or­gan­i­sa­tion’s ex­ist­ing skill base (e.g. “Our man­age­ment team is well es­tab­lished and small … see lit­tle value in in­vest­ing in their train­ing.”). • Most re­spon­dents, par­tic­u­larly in

Aus­trala­sia, per­ceived a pos­i­tive link be­tween ex­ec­u­tive ed­u­ca­tion and or­gan­i­sa­tional pro­duc­tiv­ity (Fig­ure 2). Com­ments cen­tred on its ca­pac­ity to pro­vide fo­cus, pur­pose, mo­ti­va­tion and in­no­va­tion; han­dle change man­age­ment well; and in­crease com­pet­i­tive­ness and ca­pa­bil­i­ties. Sev­eral added the caveat that the level of im­pact de­pended on ex­ec­u­tive ed­u­ca­tion be­ing ac­com­pa­nied by ef­fec­tive ap­pli­ca­tion sup­port in the work­place. How­ever, the sig­nif­i­cant mi­nor­ity of re­spon­dents, who were un­sure of a con­nec­tion, felt that it was dif­fi­cult to gauge this with­out mea­sure­ments or had only ex­pe­ri­enced lim­ited use of for­mal ex­ec­u­tive ed­u­ca­tion.


• For New Zealand or­gan­i­sa­tions, L&D (ex­ter­nal) ex­pen­di­ture was some­what clus­tered at lower lev­els; the con­cen­tra­tion was even higher for or­gan­i­sa­tions in Aus­tralia (Fig­ure 3). Fig­ure 4 in­di­cates that over 80 per­cent of New Zealand re­spon­dents an­tic­i­pate spend­ing sta­bil­ity or growth. As might be ex­pected, L&D ex­pen­di­ture was higher in larger or­gan­i­sa­tions. • A wide range of L&D providers were ex­pected for key staff groups but their em­pha­sis var­ied. For ex­ec­u­tives/se­nior man­agers in New Zealand and Aus­trala­sia, the most cited were: a train­ing provider; an ex­ter­nal coach; and a con­sult­ing com­pany. For mid­dle man­agers, they were: a train­ing provider; an in­ter­nal trainer; and an in­ter­nal coach. For high po­ten­tials, as with mid­dle man­agers, there was a strong em­pha­sis on in­ter­nal pro­vi­sion: an in­ter­nal coach; an in­ter­nal trainer; and a train­ing provider. Some vari­a­tion in ex­pected L&D provider use and staff group was also found in re­la­tion to or­gan­i­sa­tional size (and thus, likely re­sources avail­able for L&D). • Just un­der half of or­gan­i­sa­tions’ L&D in­vest­ment went to in­di­vid­ual con­sul­tants/ coaches and train­ing providers. Smaller firms were ex­pected to in­vest most in 2017 in in­di­vid­ual con­sul­tants/coaches and ‘bou­tique’ con­sult­ing com­pa­nies. Larger or­gan­i­sa­tions were likely to in­vest most in train­ing providers (class­room-based) and in­di­vid­ual con­sul­tants/coaches. • When con­sid­er­ing us­ing a busi­ness school, the most im­por­tant con­sid­er­a­tions were: qual­ity of teach­ing and learn­ing re­sources; lead­ing prac­tice, meth­ods and knowl­edge; and ac­cess to learn­ing and net­work­ing from other sec­tors/or­gan­i­sa­tions. With train­ing providers, the key fac­tors were: lead­ing prac­tice, meth­ods and knowl­edge; qual­ity of teach­ing and learn­ing re­sources; a tai­lored ap­proach; and learn­ing de­liv­ered ef­fi­ciently with min­i­mal dis­rup­tion. For Aus­trala­sia, the top fac­tor was value for money. For a con­sult­ing com­pany, key con­cerns were: lead­ing prac­tice, meth­ods and knowl­edge; and at­ten­tion to im­ple­men­ta­tion and fol­low-up.


The sur­vey re­sults pro­vide an in­au­gu­ral, yet in­depth, pic­ture of re­cent, cur­rent and pro­jected L&D trends in New Zealand and Aus­trala­sia. With their fo­cus on three key staff groups, they re­veal shared and more spe­cific pref­er­ences around dif­fer­ent L&D for­mats for ex­ec­u­tives/ se­nior man­agers, mid­dle man­agers and high po­ten­tials in the two set­tings.

As well as stress­ing the need for tai­lored L&D ini­tia­tives, or­gan­i­sa­tional size was found to mat­ter, with larger en­ti­ties hav­ing greater ca­pac­ity to in­vest in for­mal HRD. How­ever, ex­ec­u­tive/man­age­ment ed­u­ca­tion is widely re­garded as hav­ing some im­pact or rel­e­vance for at­tain­ing or­gan­i­sa­tional ob­jec­tives, and as be­ing linked to higher or­gan­i­sa­tional pro­duc­tiv­ity.

This makes HRD a crit­i­cal plank of strat­egy devel­op­ment in or­gan­i­sa­tions of all sizes. With many man­agers con­cerned about their com­pany’s abil­ity to deal with tech­no­log­i­cal dis­rup­tion and to cope with the speed of a chang­ing work­place, a key peo­ple devel­op­ment ob­jec­tive is to equip lead­ers to re­spond to, de­velop and man­age the chal­lenges that this brings.

This foray into man­age­ment ed­u­ca­tion could be use­fully fol­lowed by sub­se­quent sur­veys so as to de­velop a na­tional dataset for trend anal­y­sis and ap­pli­ca­tion. It also high­lights ar­eas for in­ves­ti­ga­tion.

In line with ad­vo­cates of mul­ti­ple L&D or­gan­i­sa­tional ini­tia­tives, these in­clude an ex­am­i­na­tion of the most ef­fec­tive com­bi­na­tions of dif­fer­ent L&D for­mats, and a fo­cus on the devel­op­ment needs of worker groups who are cur­rently un­der­rep­re­sented in man­age­ment.

Fig­ure 2: Per­cep­tions of im­pact of ex­ec­u­tive ed­u­ca­tion on or­gan­i­sa­tional pro­duc­tiv­ity, NZ and Aus­trala­sia

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