Goals Are Essential, But Beware of the Side Effects

In the corporate world, one of the most important parts of?a?leader’s job is to set goals,?both?for their organization and for individuals. The more measurable the goals, the better.??

For example:?

“Grow revenues in Europe by 10% over the next 12 months.”??

I regularly set such goals for my?team?and evaluate progress against them. Clear goals can be powerful:?They?motivate people, they create a sense of accountability, and they make performance evaluations more transparent. Also,?sharing?goals across teams improves collaboration (see John Doerr, “Measure What Matters,”?2018).?

Basically, measurable?goals are awesome. High-performing companies use them diligently. Individuals are motivated by the process of setting goals and measuring outcomes. Organizations are galvanized.??

Even countries?can benefit from ambitious goals.

“We choose to go to the moon,”?President John F. Kennedy said?in?1962,?“…because that goal will serve to organize and measure the best of our energies and skills.”??

Goals, goals, goals.??

For years, I’ve evaluated employees’ performance on outcomes against goals. A strong compliment in my performance evaluations would be that you’re “outcome-oriented.” By that, I mean that you focus on results. You don’t let distractions get in the way. You get things done. Some people seem to be wired that way—it’s a trait I’ve noticed in high performers.

But are there negative side effects to a heavy focus on outcomes against measurable goals? I believe there are three: goal-induced blindness, reduced intrinsic motivation, and failure to differentiate between luck and skill.?

Goal-induced blindness. Mt. Everest deaths are a frequent example of goal-induced blindness cited in psychology literature (Ordonez, Schweitzer, Galinsky, and Bazerman, 2009). Climbers obsess over the measurable goal of reaching the summit. They sacrifice safety and sometimes die in the process.?

There are many other ways in which the focus on measurable outcomes leads to undesirable side effects. Some people decide to bend the rules. Others sacrifice their work-life balance, even their health.?

In the early years of my career in finance, I worked in the research and trading division at State Street. I managed a small team that provided asset allocation advice to large institutional clients. Most of the time, we had to crunch numbers and deliver recommendations quickly because our firm was competing to win the related portfolio reallocation mandates. We had clear goals to grow our activities. We counted the studies, the recommendations, and the wins/losses of trading mandates. We covered the globe. Hundreds of studies every year. It was fast-paced, and I loved it. I used to call it “investment banking on steroids.”?

But I developed goal-induced blindness. I wasn’t taking care of myself. I was traveling nonstop, and I wasn’t getting enough sleep. Most of the time, upon waking up, I would need a few minutes to remind myself which time zone I was in. If a salesperson asked me to fly to Japan for a presentation with one or two days’ notice, I would be happy to rise to the occasion. It made me feel important. I spent most of the time on the road, while remotely managing the rest of the team via BlackBerry (remember those?).?

At some point, I developed a head cold that lasted a year. I was stressed. I was exhausted. And I wasn’t spending enough time with my wife, Anne (who’s a saint and has always supported me). It took me a while, but I eventually realized that my frenetic work ethic was dumb. Just plain dumb. Lack of sleep weakened my immune system and made me much less productive overall. On the negative effects of lack of sleep, I recommend Matt Walker’s book, “Why We Sleep” (2018).?

Over time, I’ve often noticed high performers who aren’t maximizing their potential because they focus on a narrow set of measurable goals at the expense of work-life balance. Most of the time, it’s not full goal-induced blindness, but it’s a blind spot. At a town hall recently, I told my division that work-life balance makes you more productive. I strongly believe that. Anyone who’s involved in fitness—whether it’s strength or cardio—knows that periods of rest between bouts of effort lead to better performance over time.

Companies can suffer from goal-induced blindness as well. Think of Wells Fargo employees opening dummy accounts, presumably to increase the specific metric/goal related to number of new accounts opened. Or Volkswagen cheating on its carbon dioxide emission numbers. Or trading and investment firms taking too much risk to juice short-term returns. Examples abound.?

Reduced intrinsic motivation. There’s an important strand of research in psychology that differentiates between two ways people are motivated:?

• Based on ego factors, such as how one ranks relative to peers, or,
• Based on mastery factors, such as the satisfaction of personal improvement (Nicholls, 1984).?

It turns out that those who focus on personal improvement and who define their goal as mastery of a new skill or some such aspiration perform better than those who focus on ego-boosting outcome goals, such as making lots of money. Self-motivation is a powerful force. Again, the world of sports provides a proof point: Athletes perform better if they work toward self-improvement rather than focusing on the score and similar metrics. Here is how Nicholls’ theory is presented in the sports performance literature (Harwood, et al., 2015):

These two conceptions […] represent how individuals define success in an achievement task. Individuals are task involved when gains in personal mastery of a skill or task enrich them with a sense of competence. In this respect, self-referent improvement or learning on a task is sufficient to generate feelings of personal achievement. In contrast, an individual is said to be ego involved when their sense of competence depends upon demonstrating superior performance to others, or via an equal performance to others but with less effort exhibited. ?

It’s the difference between a golfer whose goal is to impress others with a low handicap and another who aims to constantly improve their swing and derives personal satisfaction in doing so. Both players want to improve. Both players are highly motivated. The difference is the “why.” Psychology research tells us that intrinsic whys are the most powerful, and sports performance coaches teach their mentees to focus on them. Lee Crombleholme is a sport psychologist who works with professional golfers. His clients have won 13 times on the European Tour. See, for example, this video on "Mastery vs. Ego ". Notice?the coach saying,?“It’s not how much you’re motivated. It’s the underlying reason for your motivation [that matters].” He then differentiates between the “ego mindset” and the “mastery mindset.” With the mastery mindset, we focus on what we can control, and our self-confidence improves, no matter what the final score (the “outcomes”). There’s a link to stoic philosophy here, but that’s a topic for another article.

I must admit that I’m more in the ego mindset camp. At a personal level, and I know this won’t sound very good, but let’s be transparent: I care about what my colleagues think of me and how much money I make. I think almost everybody does. But I’m trying to redefine my “why” toward the mastery side. How can I become better at what I do, for the sake of self-improvement? That’s something I can control more easily than the opinion of others.

At the organizational level, I stress about the performance numbers for our portfolios and the growth numbers for our business. And again, as I explained at the beginning of this article, there are good reasons why measurable goals are important in the corporate world. We need to keep score, as far as I’m concerned. But, at T. Rowe Price, we also focus on what we can control: our process. What makes us better investors? Should we change how we run meetings? Can we improve how we interpret financial and economic data? How do we maximize the impact of collaboration to continually improve our investment decisions? One of our competitive advantages is the collaboration across our investment teams. At our company, the mastery mindset prevails.?

Failure to differentiate between luck and skill. In a world in which we can’t predict much of the future (in my business, we say there’s “randomness”), good decisions can lead to bad outcomes and bad decisions can lead to good outcomes. Suppose you decide to drive drunk, but you make it home safely. That was a bad decision, with a good outcome. One week later, after a good night of drinking California wine (which is better than French wine), you decide to ask a designated driver to drive you home. The driver gets into an accident. That was a good decision, with a bad outcome.

Because of randomness, the outcomes we measure against goals are often silent on the quality of decisions being made. Worse, they can mislead because they don’t differentiate between luck and skill. This problem is acute in the investment world. You can make money, at least for a while, by making very bad decisions, like holding a concentrated portfolio or investing in fads. If you don’t examine your process and the quality of your decisions—in other words, if you only focus on outcomes—you may think you’re an absolute genius. But in the long run, you’re unlikely to be a successful investor.

A while back, Annie Duke’s excellent book, “Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts” (2018), almost became required reading among our investment teams. Duke is a professional poker player and business consultant. She explains that we all instinctively associate good results with good decisions, and bad results with bad decisions. She calls this instinct “resulting.” But she explains that in poker, and in many aspects of life, “winning and losing are only loose signals of decision quality.”

So as an investor, or business executive, recognize that attaining your goal may not mean that you made the best, or even good, decisions. Doing so requires a remarkable level of self-awareness and a focus on your decision-making process rather than outcomes. Also, if you miss your target, recognize that it’s possible that you still made the right decisions but got unlucky. That’s easier, obviously. (A mentor once told me that there are only two types of investors: those who are talented, and those who are unlucky.)?

Takeaways

In business and in life, clear, measurable goals are essential. They enhance communication, collaboration, and performance evaluations. They motivate and align organizations. They take people to the moon. But like performance-enhancing drugs, goals can have side effects. To avoid the negatives of goal setting, don’t lose sight of the big picture. Try to avoid goal-induced blindness. Don’t cheat. Take care of yourself and prioritize work-life balance for increased productivity. Define your “why” in terms of developing your skills, rather than reaching specific outcomes that you can’t control. Adopt a mastery mindset rather than an ego mindset. And recognize that good decisions can lead to bad outcomes, and bad decisions can lead to good outcomes. Know the difference. Whatever the outcome, make sure you examine your process and decisions.?

?

Walker, Matt, “Why We Sleep: Unlocking the Power of Sleep and Dreams.”

Harwood, Chris, Christopher Spray, and Richard Keegan (2015), Achievement goal theories in sport, Advances in sport psychology, 157-185.

Ordonez, Lisa D., Maurice E. Schweitzer, Adam D. Galinsky, and Max H. Bazerman, “Goals Gone Wild: The Systematic Side Effects of Over-Prescribing Goal Setting,” Harvard Business School Working Paper, No. 09-083, January 2009.

Nicholls, J.G. (1984), “Achievement motivation: Conceptions of ability, subjective experience, task choice, and performance,” Psychological Review, 91, 328-346.

Duke, Annie, “Thinking in Bets: Making Smarter Decisions When You Don't Have All the Facts,” (Portfolio/Penguin, 2018).

Doerr, John, “Measure What Matters,” Portfolio Penguin, 2018.

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The views contained herein are as of the date posted and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness.

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