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Meet the MasterMinds: Sydney Finkelstein Says Think Again before You Decide

Sydney Finkelstein is a professor at Dartmouth's Tuck School of Business, and the author of Why Smart Executives Fail. His areas of research include strategy, leadership, warning signs for corporate disasters, and learnings from mergers and acquisitions.

His new book is Think Again: Why Good Leaders Make Bad Decisions and How to Keep It from Happening to You. We asked Finkelstein why smart people don't always get it right, and how to make sure we're making the right choices.

McLaughlin: What motivated you to continue your research on leaders’ flawed decisions?

Finkelstein: There are good reasons to focus on why things go wrong in organizations, especially recently. But an overwhelming amount of research and writing has been about success stories—here are the ten best things you can do to achieve greatness. I thought we were missing a really important point, which is how do we learn from mistakes?

Over at least few decades, the business environment has gotten tougher and tougher. The margin for error has declined to such an extent that leaders can’t get away with the same kinds of mistakes anymore.

The margin for error has declined to such an extent that leaders can’t get away with the same kinds of mistakes anymore.

Even just a couple of years ago, most people would never even have dreamed about what’s happened in financial services, for example. With the margin for error continuing to decrease, we need to spend more time understanding what goes wrong and why and, by implication, what to do to reduce our vulnerability to these mistakes.

McLaughlin: Looking back over the last few decades, do you think leaders have gotten better or worse at making decisions?

Finkelstein: As I said, I think the consequences for making mistakes are much greater. But I don’t think we’ve gotten significantly better or worse at decision making. If you look at business history, there are plenty of examples of companies and industries that blew up in the past. We talk about Internet bubbles and credit crises as relatively recent examples, and there were many before those. But I don’t think leaders do a very good job of learning from that history.

Interestingly, our research shows that the patterns of failure are remarkably similar across countries and cultures. That was a bit of a surprise because we know how different cultures can be in how they approach business. I think that the commonalities in people’s mistakes come down to the fact that we are all much more alike than we are different, regardless of where we’re from.

Interestingly, our research shows that the patterns of failure are remarkably similar across countries and cultures.

When we looked at the research in neuroscience, among other things, and applied that to strategic decision making, it wasn’t hard to see why. Our brains evolved in a way that predates any modern country. So the reason human decision making is not any better or worse than in the past is because, fundamentally, the way our brains are wired to make choices has not changed.

McLaughlin: What do you think are the primary reasons that leaders make bad decisions?

Finkelstein: If I were to distill a lot of research down to two key driving forces, I’d say one relates to experience and the second to emotions. By experience I mean that, in many instances, people make bad decisions because they think they have the right experience base for a particular situation when, in fact, they don’t.

When they face a challenge that is very different from anything in their past experiences, most leaders will recognize that they need to bring in some other talent or perspectives. But often, the worst decisions result when your past experiences are somewhat related to, but not exactly the same as, your present challenge. So you mislead yourself into believing hey, I’ve got the right experience basis to decide this, so I’ll do what I’ve done before and it’s going to work. But it doesn’t.

McLaughlin: When there is that mismatch between leaders’ experience and a new situation, is that when you hear them say things like, my gut is telling me to do this?

Finkelstein: That’s a really interesting question. One of the motivating questions we had about decision making was about gut instinct, or intuition. How accurate do our first instincts tend to be? We looked at research from many different disciplines, fields, and people who are trying to get a handle on this. But the jury is still out on what makes sense and what doesn’t. I think that gut instinct is the most dangerous when your experience base seems to be the right one but it’s not.

McLaughlin: Do we evaluate smaller decisions differently than we do bigger or strategic ones?

Finkelstein: When we’re aware that more is at stake, we do tend to be “more thoughtful” about decisions. But the research on how we make decisions is remarkably consistent, regardless of the size of the decision. The textbook approach to decisions goes something like this: First, what are we trying to figure out? What is the problem, issue, or opportunity? Then, let’s identify a range of options for solving this problem. What are the pros and cons of each option? Let’s weigh them and collect great data so we understand the choices. And then, let’s come up with a judgment.

That’s the textbook approach we teach in business schools, and many people think that’s what we actually do. The research shows, of course, that we don’t do anything like that. Instead, we come up with a solution first—almost instantaneously. That’s because our brains process information on a subconscious level much faster than we can rationally think through the pros and cons. So we come up with a solution and then we do a quick evaluation of it. Does it sound reasonable or not? If we come up with some fundamental or serious flaws with that choice, we’ll look for a new solution.

We come up with a solution to a problem and then we try to figure out if it’s the right thing to do.

But if we don’t, we’ll just keep going with that solution. We come up with a solution to a problem and then we try to figure out if it’s the right thing to do. It’s not at all the textbook method. And we do that for small decisions and big decisions. For bigger decisions—sometimes when there’s more money on the line—organizations have some safeguards in place to require a more thorough review, but that’s the only real difference.

McLaughlin: Does willingness to hear contradictory or conflicting information have a bearing on the quality of the decisions leaders make?

Finkelstein: Absolutely. That is one of the most critical differentiators between effective and ineffective teams. Ideally, leaders should surround themselves with talented people from complementary fields, each of whom has an opportunity to impact decisions.

But you don’t see that happening very often because most organizations are very hierarchical. How often do people go to their boss and say, you’re wrong, and here’s why? We’d like to think that’s how it works but, in reality, the political nature of organizations works against it. So the answer to your question is yes, different points of view are crucial. But, practically speaking, I would say most organizations are not set up to facilitate that input.

McLaughlin: Which I guess, in turn, adds to the risk of making strategic blunders?

Finkelstein: Right. There are so many examples. Just take what we know so far about the subprime mortgages on Wall Street. Many of the banks and investment companies have risk management functions, and people from their risk management side were saying the red flags are out here, we’re starting to do things that don’t make a lot of sense. And they were either disregarded or, in a couple of cases, fired.

We studied a number of situations where exactly that kind of thing happened. People brought up alternative points of view and the central decision maker, the CEO or, in some cases, a military leader, found a way to undercut the person making the argument. Leaders with power can do that. They can question someone’s judgment, experience, knowledge, or patriotism. They are not challenging the argument, but trying to discredit the individual who’s bringing that argument. That’s very common.

McLaughlin: If you were to give us one piece of advice on how we could make better decisions, what would it be?

Finkelstein: My advice would be to assume that, as a decision maker, you are inherently biased. Our brains have filed away all kinds of experiences and emotions. Most of that brain activity is at a subconscious level, and it leads us to think in a particular way, creating bias.

That’s the reality for everyone, and why we called this book Think Again. In a sense, what happens at the subconscious level is not rational. Past events, emotions, and prejudgments influence us toward particular choices. And so we need to think again. Let’s not be naïve. Everyone is subject to these influences. They’re much more powerful than any individual has the ability to resist.

Given that, let’s always consider what safeguards we need to put in place to reduce the odds that we’re going to fall into the trap of our own biases. I don’t know that you can eliminate that danger, but you can reduce it.

McLaughlin: Thanks for your time today.

You can find out more or reach Professor Finkelstein at Dartmouth.