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Nobel Prize-winning psychologist to CEOs: Don’t be so quick to go with your gut

Taking a more disciplined approach to decision-making won’t be easy for many executives. “It’s quite hard because you tend to form a global impression unless you make a special effort not to form a global impression,” Daniel Kahneman said. (iStock)

Nobel Prize-winning psychologist Daniel Kahneman -- along with Amos Tversky, his longtime collaborator who died in 1996 -- changed the way the world thinks about economics, upending the notion that human beings are rational decision-makers. Along the way, his discipline-crossing influence has altered the way physicians make medical decisions, political scientists think through foreign policy and investors evaluate risk on Wall Street. It’s fair to say he’s changed the way many think about thinking itself.

Now, in a new article written with two co-authors, Kahneman could help influence the way senior executives approach decision-making. In a paper published Monday by the MIT Sloan Management Review, Kahneman and professors Dan Lovallo and Olivier Sibony outline a process for making big strategic decisions -- things like whether to make an acquisition, launch a new category of products or invest in a start-up.

Their suggested approach, labeled with the wonky name “Mediating Assessments Protocol,” or MAP, has a simple goal: To put off gut-based decision-making until a choice can be informed by a number of separate factors.

“One of the essential purposes of MAP is basically to delay intuition,” Kahenman said in a recent interview with The Post and his co-author Sibony. The structured process calls for analyzing a decision based on six to seven previously chosen attributes, discussing each of them separately and assigning them a relative percentile score, and finally, using those scores to make a holistic judgment.

Kahneman said that while it may be common for teams of executives to make briefing books that are divided into topics or chapters for big decisions like an acquisition, it’s not as common to have a decision divided into subcomponents and each one evaluated independently.

“That, I think, is a departure from the way most important decisions are made, and that’s the unique element in MAP,” he said.

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He compares it to thinking of big strategic decisions like job candidates.

“When you’re making an important decision, any option is like a candidate,” he said. “You should think of what are the essential dimensions that would make a difference between a good option and an option that should be rejected, and you should look at those dimensions one at a time.”

In addition to being a more disciplined approach to big strategic decisions, it may also help limit dreaded groupthink.

“By breaking up the process and making it fact-based, we’re doing as much as we can to inhibit groupthink,” Kahneman said. “Groupthink is as about the conclusion, [and with MAP] you’re trying not to get to the conclusion too early.”

Sibony, a former leader of McKinsey & Co.'s corporate strategy practice and now an affiliate professor at HEC Paris, said that while many companies have detailed processes in place for making lower-level decisions, ones made at the higher level can be subject to more gut-based instincts.

“Generally speaking I think it’s fair to say that the amount and detail of the process is inversely important to the importance of the decision. Every company in the world has a process in place to decide how to buy paper clips,” he said. But “very few have a process to make large unusual purchases which makes sense, after all, because they are unusual. You haven’t had an opportunity to design a process to make them.”

The other reason strategic decisions tend to have fewer disciplined processes, he said, is because of who makes them.

“They are made at the top of the organization," he said, "and if you are at the top you tend to trust the other people who are at the top,” unlike on decisions that are delegated to underlings.

Sibony believes many senior executives will be surprised to read their advice. Many managers, he said, think “they need to form a complete perspective and that trying to break it down into small pieces is not the way to go,” he said. “What we’re saying is do break it into small pieces -- but then use these ‘mediated assessments’ to inform your intuitive, holistic decision.”

Because of the more occasional nature of strategic decisions and the challenge of comparing outcomes, Kahneman and Sibony said it’s very hard to get quantifiable evidence of its effectiveness. But anecdotal experiences have been encouraging, and evidence of using a more structured process similar to MAP in hiring job candidates is strong, they said.

One example comes from Kahneman’s own career, and goes back more than 60 years. When serving in the Israeli army, Kahneman came up with a new way to help predict who might make a good combat soldier. Instead of making an impression-driven, intuitive decision about who interviewers thought would succeed -- the way many managers still hire people today -- he replaced that approach with one that gave recruits six separate scores, such as sense of duty, punctuality, energy level, and at the time, the 1950s-era “masculine pride.” An average of the scores on the six ratings was much better at predicting a recruit’s success than loose, unstructured interviews.

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Taking such a disciplined approach to decision-making won’t be easy for many executives. Our brains don’t work that way, for one.

“It’s quite hard because you tend to form a global impression unless you make a special effort not to form a global impression,” Kahneman said.

Two tricks that help, said Sibony, are to divide the team evaluating the factors -- having an H.R. specialist make the talent assessments, for instance, while a due diligence team evaluates the quality of the business -- in order to keep things separate. The other is to assign a relative percentile score to ensure things stay more concrete.

After all, it can be uncomfortable to think this way because our brains are geared toward “excessive coherence,” or the tendency to suppress contradicting evidence.

“It’s much easier to decide you’re going to make the acquisition or hire the candidate when you think it’s great on all dimensions," Sibony said, “than when you say it’s great on five of the assessments, but only okay on one of them and we have a concern about the other.”

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