Why Smart People Make Bad Decisions
Uhhuh. Hm hello i'm scared green from harvard business that or you know on the phone favorite can you think i'm seeing there at dartmouth tech schools net any answer why smart is now you block written would collapse there's jel light had and and you campbell. It's called sync again why good leaders make that decision how to keep it from happening to you we're gold today is hopefully to help those bad decisions. Not happening t at a basic signing on the program thank you sarah great to be on. I just wanna start by asking you about that some title y- good leaders make bad decisions do thinkpad you or making them either. I know has a good way to look at it the reality is that being a successful leader. Is not just about intelligence not just but being smart it's about actually making the right moves at the right time and people that have the intellect the track record the success are not necessarily going to be good leaders if they make bad decisions and remarkable thing is. They often do. Again give us an example well most people would have considered john saying a tremendous theater up until recently. John saying was the formal goldman sachs senior executive who around merrill lynch and successfully sold the company to bank of america. Just about the beginning of two thousand and nine and it turned out to be very successfully acquisition from maryland shareholders because if wasn't for that they work on the same way of as beam and and is bear stearns. He also had a long track record and many other things that he had done a golden before that. What city do wrong well i think in the last few months what we found is that john saying have spent a lot of time looking for bonuses for his former. Staff members trying to get a large bonus for himself this while bank of america and even merrill lynch what struggling there's the famous million dollars spent on office decoration in the list goes on. No it's going to say those were good things to do know that stays not intelligence mark cable the leader but he did them. Can you really tell whether i decision was good or bad without the benefit in hindsight i mean when things come out later it seems like oh of course that was a terrible didn't drink but how can you know in a moment that did he says you won't turn out to be wrong. The reality is of course she can ever guarantee that any decisions going to be successful he'll be great if i could tell you how to do that but no one can the other hand there are a lot of warning signs and a lot of ways to think about. Weather's decision has at least they reasonable probability of being successful and when we did our research for think again we really spent a lot of time thinking about what the decision makers and you at the time that they. We're making the decisions. And tried not to think about all the subsequent events that may have had an impact and so the reality is we're not going to about a hundred percent but i think there's enough that you need to look at and then you can look at at the time you making a decision that because significantly influence whether it works or it doesn't. What are some of those maybe red flags that you need to look at to make sure you're not making that decision. In our research we identify for key it red flag conditions. The first one is experience and misleading experience in particular. Most people will think of course experience a good thing and many instances it is but the reality is that if that experiences not close the tailored the situation that you're in it could lead you a straight could lead you in the wrong direction. One of the classic examples during the financial crisis really is sticks folded neiman brothers and if you think about what happened to be menu go back in their history you find that about ten years ago during the long term capital management crisis. And i was in the late nineteen nineties pixels really save me meant. He battle through the problems because i created an international financial crisis and he had save the company and when we move forward to the current financial crisis driven by sub prime mortgages and the like. Dick full continue to think you could figure it out and solve the problem it had experience in one situation. Thought it was the right experience kept on going and the problem that encountered is that this type of financial crisis that we've been in in the last year so he's so dramatic so fundamental it's just not the same magnitude is the largest financial crisis we've seen since the great depression. And the upshot is that he was by trying to save the company he didn't put himself in a position to actually sell daemon brothers and him and went essentially bankrupt and get an opportunity to sell the same way that the. John saying a merrill lynch did successfully self so experience yes it's great but let's be careful make sure that it's not misleading spec. The second key red flag is both self interest and you know we all know self interest is a big driver of. Behavior by people in all walks of life adam smith said as much more than twenty years ago but i think what most people don't realize is that self interest. Often operates at a subconscious level so much so that we often don't even know that we're behaving in the ways that we are we don't even realize were being a self interested as we are and. We can go back to john staying in the story of the bonuses and does anyone really think that he consciously sat around and said let's see how i could rip off shareholders i'm quite certain he never did think that at all. He behaved in this self interested way because that's the way it always been doing it sway wallstreet operates and it never occurred to him that there was anything unusual it didn't even enter a stream of consciousness. And you know sometimes we talk about a sense of entitlement a different walks of life i think the sense of entitlement comes up because of this self interest that becomes. Fundamental to have people think and they don't even know they're doing that. So there's nothing changed and there's misleading experience in one of the last you. Last to pre judgments pre judgments refers to a decision that somebody makes really early a judgment about a problem somebody makes really early and then they refused to adapt and change and this is another one of those things that people are aware of it everyday life how many of us have. Just decided something is the way it is and refused to budge. We study hurricane could train up. In in particular the department of. Homeland security's operation center and how they manage to eat federal government's response to create a and the head of the operation center decided right at the beginning that in fact the tree no was going to be a quote typical hurricanes no different than anything in florida. And as result when you make these pre judgments you tend to look for data that is confirming that supports your point of view and you tend to discount or even ignore. Data that speaks otherwise and actually operations had who testified to congress afterwards so we have a long track record of this. Actually say they saw report on c. n. n.. That people were partying in the french quarter that they dodged the bullet and he said well you know i saw that and what expect me to think. And the reality is at the same time he was getting literally dozens of other. Notices and reports from different places that were indicating about the the movies were beginning to breach and there was a much more serious situation to pre judgments very very dangerous situation and one that i think is remarkably common. And then finally attachments. Attachments refers to the way we are all influenced by people by places by things. And they influence us in ways that sometimes we don't even know. And. One of uh really good examples i think of attachments in action is if you go in the what happened to yahoo and mid two thousand and eight when jerry yang visio in the founder the company. Was offered a bid by microsoft to acquire yahoo and the reaction was absolutely nots we want more money is not enough. And why they say that well it's a story i think of a leader that was the founder the company that have this tremendously emotional attachment. To yahoo and not only that but to sell the company to microsoft which in silicon valley for a lot of their competitors a scene is evil empire. That's even a negative attachment that combination of being the founder of yahoo and not wanting microsoft to make an acquisition simply because it was microsoft. Ended up costing share holders thirty billion dollars because that's the difference between what microsoft was offering and what the stock price and where the stock prices language for a number of months afterwards. So what touch mince another one of those red flags that i think decision makers i've got to be on the alert for interesting when you talk about these went blank attachments. South interests. Misleading experiences and pre judgment it sounds like a lot of what you're talking about here's brain science kind of science. Do we have out smart our own brains is we're going to stop ourselves from making these choices. Uhhuh it's a great question because that's the heart of all this is really how're brains work and we spent a lot of time you know research for think again to try to learn whatever we could about this the nurse scientists. The cognitive psychologist decisions there is all these different academic areas of and spending a lot of time the last decade of made huge discoveries. And i think if we were to summarize the one or two things that uh are most pertinent for our discussion that's come out of that research we would say that number one. Our brains are geniuses that pattern recognition we collect all sorts of data and we create a pattern. And whether or not we act on that pattern depends on our emotions it depends on what we call emotional tags where the extent to which we have a sense that this is a good thing to do or a bad thing to do on the basis of emotions and this is the thing that i think. A lot of people. Don't really understand and that surprises people not really leads us to highlighting importance of these red flags. Decision making is not a a rational. Step by step process it doesn't follow the text book that says that's identify a set of alternate is let's look at the pros and cons in the costs and benefits and. Wait them all to come up with the best optimal solution mean it sounds good but the way in which we decide is very different than that it's much more emotionally driven that's what we actually call one planet of time where we come up with a solution to a problem without going to any. Discussion of alternatives without thinking about pros and cons we jump to that conclusion because our emotions. Quickly interact with the pattern recognition process and come up with that solution f solution might be writer might be wrong over the eons of development of the human brain the reality is that we're pretty good at this. Most of the time this intuition this what mountain glad will call blink is going to be right but sometimes it's not. And the key thing to point out is what are the conditions when that intuition that quick emotional response to a problem is not likely to be or potentially might not be the right decision when those red flag conditions exist. Before we wrap up i just wanna play devil's advocate for a minute and wonder in there a danger in trying to make ourselves choose too widely. Is there a down side to being more cautious i know in the current environment that probably seen shrek called that. There is a school it's not out there that says debt that decisions are you all in the marketplace that the market will sort then out. And that there's a danger when you become too cautious and have too many safeguards in place and that is ends up making any decisions from getting me you know i like bad decisions as much as the next person as long as it's somebody else that does them and not me. And so i'm happy to learn from other people and i'm happy learn from my own past bad decisions because after all everyone everyone will have some. But when i'm in the midst of trying to figure out something important i'm not interested in being uh case study for someone else i want to try to get it right and i think that's the way most people probably think about it thanks said so much for talking to i stay my pleasure sarah. 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