Ever since I heard a shivering Han Solo say to Chewbacca , "A Jedi Knight? Jeez, I'm out of it for a little while, everyone gets delusions of grandeur!" in Return of the Jedi (on the day it opened way back when), I have been fascinated by the word delusion. Little did I know then, that the word delusion would be used to categorize cognitive biases that inhibit the way we understand the world around us and allow them to to surreptitiously influence sub-optimal decision making. The idea has also caught the attention of academics and is the source for books and academic research.
One such book, The Halo Effect:... and the Eight Other Delusions That Deceive Businesses, Phil Rosenzweig identifies and discusses nine cognitive biases (referred to as “delusions”) that impact business decisions and management thinking. I have identified many more and included them below.
Rosenzweig argues that these delusions mislead business leaders and influence their decisions in ways that don't reflect the true complexity of organizational performance. By recognizing these cognitive biases, we can work to avoid them and make more informed, realistic judgments. These biases often lead people to make flawed judgments and inaccurate assessments.
Here’s a detailed breakdown of some of my favourites:
- This is the central delusion that Rosenzweig's book is named after. It refers to the tendency for people to make global judgments based on a single characteristic or impression. For example, if a company is successful in one area, we sometimes automatically assume it excels in all other areas as well. In business, if a CEO is charismatic, people might assume the company’s performance is strong even if there is no evidence to support that. This bias leads to overly simplistic assessments based on partial information. In the context of business, observers think they are making judgements of a company's customer-focus, quality of leadership or other virtues, but their judgement is contaminated by indicators of company performance such as share price or profitability. Correlations of, for example, customer-focus with business success then become meaningless, because success was the basis for the measure of customer focus
The "One Big Thing" Delusion:
- This delusion involves oversimplifying complex situations by attributing success or failure to a single factor or decision. In business, people often look for a single “silver bullet” that explains everything—such as the right strategy, innovation, or leadership decision. This leads to a reductionist view of success or failure, ignoring the complexity of business operations and the multitude of factors at play.
The Delusion of Single Explanations:
- Arguments that factor X improves performance by 40% and factor Y improves by another 40%, so both at once will result in an 80% improvement. The fallacy is that X and Y might be very strongly correlated. E.g. X might improve performance by causing Y.
The Delusion of Absolute Performance:
- People often fall into the trap of evaluating performance in absolute terms rather than relative terms. This delusion causes individuals to misinterpret the success or failure of a company by not considering the competitive environment. For instance, a company might perform well in absolute terms, but in comparison to its competitors, it could be underperforming. Ignoring this relative context leads to misguided evaluations. In other words, market performance is down to what competitors do as well as what the company itself does. A company can do everything right and yet still fall behind.
The Delusion of Correlation and Causality:
- This delusion is about mistaking correlation is causation. In business, it’s common to assume that because two events happen together, one must be the cause of the other. For instance, a company might perform well after implementing a new strategy, and people might immediately conclude that the strategy caused the success, without considering other external factors.
The Delusion of the Winners' Curse:
- This delusion refers to the tendency for people to focus on the successes of companies or individuals, particularly when they win a large competition or achieve an extraordinary result, while ignoring the broader context or the fact that such success could be due to factors like luck. It leads to overestimating one's own capabilities or the reliability of a particular strategy or decision, because people tend to forget the losses or failures that didn't make the headlines.
The Delusion of the Competence Cult:
- This is the tendency to place excessive value on competence, assuming that if someone is good at one thing (such as a particular skill or expertise), they must be competent in all areas. In the business world, this delusion leads to the assumption that skilled managers or leaders in one field can excel universally across all areas of business, even when the skills may not transfer.
The Delusion of Learning from Success:
- People often believe they can learn more from their successes than from their failures. This delusion occurs when individuals or companies reflect on their successes and try to extract a generalizable lesson or pattern, without acknowledging that success is often influenced by external factors, random chance, or circumstances that can't be easily replicated.
The Delusion of Lasting Success:
- The "secrets of success" books imply that lasting success is achievable, if only managers will follow their recommended approach. Rosenzweig argues that truly lasting success (outperforming the market for more than a generation) never happens in business.
The Delusion of the Wrong End of the Stick:
- Getting cause the wrong way round. E.g. successful companies have a Corporate Social Responsibility policy. Should we infer that CSR contributes to success, or that profitable companies have money to spend on CSR?
The Delusion of Connecting the Winning Dots:
- Looking only at successful companies and finding their common features, without comparing them against unsuccessful companies.
The Delusion of the "Natural Leader":
- This delusion involves the belief that successful business leaders possess inherent qualities that make them uniquely capable of running a company. This can lead to the idealization of certain leaders and an overestimation of their abilities. The truth, however, is that effective leadership can come from a variety of approaches and backgrounds, and many of the factors contributing to success are beyond an individual’s inherent traits.
The Delusion of Organisational Physics:
- The idea that business performance is non-chaotically determined by discoverable factors, so that there are rules for success out there if only we can find them.
The Delusion of "The Good Old Days"
- This delusion occurs when people idealize the past and assume that things were better or more stable in previous times, which leads them to believe that success can only be achieved by returning to old methods or practices. It blinds them to the realities of the present and the future, where change and adaptation are critical. Companies that fall into this delusion resist innovation and may miss opportunities for growth or improvement.
Which one(s) resonate with you the most?
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