When I help senior leaders with their strategy creation efforts, I’ll review past strategies and then the results, financial and otherwise, that those strategies produced. I’m frequently amazed when I see that smart, capable executives have developed and implemented strategies that should have been obvious losers from the get-go. Here’s an example: Company A, a financial services powerhouse, acquired a mutual fund company – a business that they had not been in previously. The deal team and CEO together believed that mutual funds would round-out their product portfolio, enabling them to cross-sell, improve customer retention and, as a result, increase revenue and drive down acquisition costs. While I’m grossly oversimplifying this example, on the surface, it made sense.

Here’s what didn’t make sense: Post-acquisition, the inquisition began. The acquiring company began summarily firing executives from the acquired company, believing that because they (the acquiring company) were bigger and more profitable, they could and would run the acquired company better than the executives they inherited were running it. Keep in mind that the acquiring company had no experience in the mutual fund business. A couple of years later, they folded their tent in the business because they ran the acquired business into the ground. How did this happen? How did really smart and capable people conclude that this course of action would work?

Read on!

The emerging fields of behavioral finance and economics help explain why smart people make dumb decisions. These two disciplines use social, cognitive and emotional factors to understand the economic decisions of individuals and institutions performing economic functions, including consumers, borrowers and investors, and their effects on market prices, returns, and resource allocation. They integrate the insights of psychology, economics and finance. In turn, these disciplines have spawned an even newer field – behavioral strategy – which helps decision-makers anticipate and either avoid or ameliorate the impact of their own inclinations or impulses when making strategic decisions. Traditional economists disdain and/or dismiss the emerging fields of Behavioral Economics and Finance because in their world, the economy operates without the messiness of human interaction.

In reality, we all make decisions based upon fancy as much as fact. Whether in business or government, leaders frequently succumb to the following:

Hubris. We’re the best. We’re the smartest. We’re the Masters of the Universe, but, of course, we’re humble. For some reason, smart and capable executives often believe that they are infallible. The truth: We all achieve success because of our strengths and in spite of our weaknesses.

Excessive optimism. I do believe that optimism is good. There is a difference between optimism and Pollyannaism, however. (I once had a CFO working for me that I called “Dr. No.” One time during a meeting break, No pulled me aside and asked, “You wanna know how I got so pessimistic … by financing optimists!”). I have sat through many meetings with executive teams that started with a rational debate of issues and concluded with “group think.” Somehow, legitimate challenges often get underestimated because executives want to take a specific action or complement of actions to achieve a pre-determined end.

Confirmation bias. That’s the screening out of data that doesn’t support a predetermined conclusion. Recently, I observed an executive team meeting conducted to assess the wisdom of entering a new market. During the PowerPoint presentation by the Division President to the CEO, CFO and General Counsel, I noticed that several relevant and potentially game-changing points that should have been included were not. When I asked the Division President after the meeting why that was the case, he responded: “Our CEO really wants to do this. I didn’t want him to confuse my countervailing argument with resistance to the initiative.”

I see this kind of behavior frequently among executives and companies of every size in every industry.

Availability of data. That’s a reliance on information that’s easily accessible to make a decision. The relentless pursuit of the truth frequently requires deep digging for data and thorough analysis. Hard, but necessary.

Overconfidence. While “excessive optimism” may explain front-end blunders in decision-making, overconfidence explains why many executives assume that they can overcome negative circumstances by (pick one or more): Our people are great – they can do it; the current prevailing economic winds will not continue to blow and if they do, we can handle them; the aggressive, predatory competitive environment will certainly abate but if not, we’ve successfully dealt with it before, etc.

Confusing intuition, beliefs, feelings and facts. 2 + 2 = 4; everything else is subjective. We all impose our perspectives, informed by our experiences, on any situation. The BEST executives are able and inclined to differentiate among facts, intuition, beliefs and feelings when making decisions. I’m not implying that only facts matter; I am implying that facts are facts and those other things are not facts.

Faulty or short memories. The best among us learn from experience. It’s called wisdom. As I’ve said many times, while wisdom is developed from experience, it is not the automatic by-product of experience. Here’s the formula: Wisdom = experience x reflection x relentless honesty x accountability (accepting consequences with no blame, no finger-pointing, no excuses, no whining, no escape-hatch) x behavioral change. Each of these elements is necessary, but alone, each is insufficient; it takes them all.

Deference to “experts.” A lot of executives who retain strategy consultants defer to the recommendations of said consultants without significant challenge. Many consultants play to the preconceptions of executives, intentionally or not. Frequently, the result is not pretty!

Under-appreciation of the power of their voices. An executive’s voice carries heft. When a CEO asks a question and implies a right answer, he shouldn’t be surprised when he gets answers that comport with his own opinion. A “nudge” from a CEO during a meeting often results in a lack of challenge, an absence of debate, and a preponderance of “group think” that mirrors the CEO’s own thinking.

When executives review this list of decision flaws, most recognize each as an affliction that affects other people, but certainly not them. Maybe the biggest decision-making flaw plaguing executives is this one: The failure to acknowledge their own decision-making fallibility and making sure that they create cultures of aggressive inquiry. “Smart” does not mean “insightful.” “Smart” does not automatically imply the inclination to confront and challenge. “Smart” may be necessary, but it’s insufficient.

Copyright 2011 Rand Golletz. All rights reserved.

Author's Bio: 

Rand Golletz is the managing partner of Rand Golletz Performance Systems, a leadership development, executive coaching and consulting firm that works with senior corporate leaders and business owners on a wide range of issues, including interpersonal effectiveness, brand-building, sales management, strategy creation and implementation. For more information and to sign up for Rand's free newsletter, The Real Deal, visit http://www.randgolletz.com.