How Poor Decisions Prevent Growth

In China kids learn 覆水难收 fù shuǐ nán shōu, which translates as “spilt water is hard to recover.” We teach our kids not to cry over spilt milk. In business, to describe a futile venture and the irrelevance of sunk costs we say “don’t throw good money after bad”.So why do many decision makers avoid this simple advice?  The answer– we are all influenced by many cognitive biases.  

I consistently see how these biases lead to poor decision making and prevent many companies from realizing their growth potential. Indecision, or very reserved resource re-allocation, creates a business environment where inertia reigns.Talent and dollars don’t flow to the more attractive opportunities, even when it's obvious what those opportunities are. Our research on this found that 1/3 of the companies in our sample had a 99% correlation year on year in capital, and the average was 92%. In other words, the immense amount of strategic planning in companies mostly results in only modest resource shifts.

There’s heaps of fascinating research about the many behavioral biases we are all subject to as individuals. These include remarkable optical distortions and the way we miss the obvious when we are concentrating on something else. We have a tendency to overestimate ourselves - most famously 90% of drivers assess themselves as above average in ability. We have an attachment to what we already own - how come we won’t buy concert tickets from scalpers at an inflated price, and simultaneously won’t sell tickets we own at face value? We also tend to overweigh risks, even against the chance of regret rather than actual loss.  

It’s no surprise then that group decisions are even more flawed.

So how can we overcome biased decision making?

Here are some biases that we often see, followed by some techniques we use to overcome them. We have found that by applying these techniques companies can make better decisions, which in turn increases their resource reallocation and creates more profitable growth.  

A true story: An executive in a successful European company was excited about the prospect of entering China. He developed a brilliant business case, convinced the management and board to make a small acquisition and entered the market. He relocated with his family to lead from the front. Soon after, he discovered that many of his assumptions were wrong.

The overall market was perhaps only a quarter of what they had previously estimated. Demand was fragmented and small in the few cities they initially focused on. Costs were higher than expected and customers’ willingness to pay a premium for the higher quality offer was lower. The company they bought turned out to be a sham with false accounting and some unacceptable practices. A revised business case suggested it may take another 20 years to get to the revenues they had originally predicted would arrive within 3 years, and it was not clear if they would ever be profitable.

The executive’s recommendation? “We already invested so much – we should invest more and look for new creative approaches.” Wrong answer. He’s throwing good money after bad. But would you blame him?

No organization makes perfect decisions. And right decisions are by definition not risk-free, so occasionally they will go wrong. Hopefully though, some of these ideas will help you improve yours.

What kinds of decision making biases have you have experienced? Let me know in the comments below.

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 I co-lead McKinsey & Company’s Growth and Innovation practice, where I focus on growth, innovation, consumer insights, and commercial excellence. Please connect with me here on LinkedIn.