7 Psychology Lessons for CEO
The core task of chief executive officer (CEO) is to ensure that people in organizations make the best possible decisions for the company from a business perspective. But how do people actually make decisions? What cognitive illusions – or other disruptive features of human thinking – do decision makers, such as managers and CEOs, run into in organizations? And what can controllers do to avoid these pitfalls?
- The Halo Effect
Something we like is more likely to get our vote than something we dislike or are neutral about. An applicant who makes a very good first impression is therefore more likely to qualify for a position than an applicant who is less successful in the interview, but who has years of experience. Due to the halo effect, the weight we give to the first impression is so great that information that comes in afterwards is largely wasted.
- Ignoring Statistics
Read the following personal description: “Steve is shy and withdrawn with little interest in people or reality. He is very neat and needs order and structure, and an eye for detail. ‘Does Steve work as a farmer or librarian? In an American survey, most respondents chose a librarian, while the US employs 20 times as many farmers as librarians. In short, they purely relied on their intuition. It is important to know that we tend to ignore statistics when making business decisions, such as when allocating resources to (new) markets.
- Ignoring Uncertainty and Chance
A large number of black swans in the past have shown that we quickly overestimate the extent to which we understand the world, and grossly underestimate the role of chance in events. When a CEO has made a number of successful acquisitions, we will be inclined to intuitively believe that the next deal will also be a success. We are far too willing to reject that many things that happen in life are by chance.
- WYSIATI (What You See Is All There Is)
Our intuitive system is insensitive to the quality and quantity of information we have at our disposal for a decision. It is the consistency of the information that is important to form a good story, not the fact that it is complete. When we know little, it is easier to put everything into a story. For example, we place too much confidence in the quality of the story we have created, even if it is composed of limited information. We also do not allow enough that there is a possibility that crucial information is missing to make a good decision.
- Replacing the Question
When confronted with a difficult problem or a difficult issue, we often replace the complex question with an easier one. For example, when we need to assess the odds of a particular political candidate, we will judge how well or badly this person did in a recent interview. It is no different with business issues. For example, when predicting the value of a company in a few years’ time, we will assume last year’s performance. However, this information is not sufficient to arrive at an adequate prediction. Our intuitive thinking system tends to draw conclusions too quickly based on pieces of information. We clearly prefer certainty over uncertainty, which often leads to premature conclusions.
- Predicting too optimistically
Intuitive predictions are often too extreme. To adjust these predictions, references must be found in the same category, and we must arrive at a baseline forecast. The quality of the evidence must also be assessed. The effort this takes is justified when a lot is at stake. As a controller you cannot stand still. You want to proactively support your managers in making decisions in strategic situations. What is the right approach for this? Follow the training The Controller as a Business Partner.
- Overestimating one’s own Abilities
Most people sincerely believe they are superior in several desirable areas. For example, leaders of large companies often make huge gambles in mergers and acquisitions, mistakenly thinking that they can better manage the assets of the company to be taken over than the current owners can. The illusion of skill is also common on the stock market. Most investors believe they can do better than the market, while years of research show that a dart-throwing chimpanzee can fare just as well. The success of funds largely depends on luck, not skills.
Of course, confidence in our ability to make the right decisions is largely grounded. Our associative brain is a super computer that is capable of a lot. However, our mental model of a situation always deviates from reality. We can rely on expert intuitions based on thousands of hours of experience, but only in a stable environment and not when a lot is at stake. In any other case, focused attention is needed on the problem and the realization that making decisions is hard and strenuous work.