The secret weapon of CEOs

(Third of four parts)

Olivier Sibony, former senior partner at McKinsey, wrote the book “Noise: A Flaw in Human Judgment,” together with Nobel Prize-winning economist Daniel Kahneman and US policy adviser Cass Sunstein. In the past two weeks, Sibony taught us how noise in organizations could best be minimized. He gives us more inputs on the matter:

Q: Are there times when noise is okay, maybe even good?

A: There are lots of times when variability—differences of judgment—are okay. We define noise as unwanted differences in judgments, so by definition, it’s not okay. When is variability okay? First, when it doesn’t matter, when it’s a matter of taste. You like chocolate and I prefer coffee, you like Beethoven and I prefer Mozart. We don’t need to agree, we can agree to disagree.

Second, variability is okay if we are in a market, not an organization. Say you and I are making a trade—you’re selling something to me, and I’m buying it—the reason we can make this trade is because we have a disagreement, you’re selling because you think it is worth less than its price, I’m buying because I think it is worth more. If we weren’t in disagreement, we wouldn’t be able to trade. But, this is not noise because in the market, in a week, a month or a year, we’ll know whether you or I am right. We are essentially competing against each other. The market expects us to have different judgments because we’re competing against each other.

Third, variability is fine in innovation, where for instance, you are a researcher in a pharmaceutical firm developing a COVID-19 vaccine. I [am doing the same] in another firm. You think that mRNA is the best approach, I think it is inactivated virus. Well, let’s see what works, let’s have different people competing.

But if you and I were working in the same trading firm as analysts making a stock recommendation, and we disagreed, that would be noise. We are each supposed to make a judgment on behalf of the organization, yet most of the time, only one of us would actually make the call. And the fact that unbeknownst to the rest of the organization, our judgments differ—this is noise.

And if you and I are working in the same pharmaceutical firm, and we need to decide on which vaccination strategy the firm will take, and we have different points of view, that is noise.

Q: To reduce noise, you suggested that individuals write down their own decisions before meeting as a group to make a judgment. How else can we minimize noise?

A: Do a premortem. Suppose we’ve been deliberating a difficult decision for a long time, and we’re about to make it. Before we do, you say, “Let’s do a premortem. Let’s imagine that we are five years [into the future], and this decision has been a complete disaster. And we are gathered here in 2027 to do the postmortem of our decision to understand what went wrong. Each of us will take two minutes—in silence—with a sheet of paper to write down the story of what went wrong.” Afterwards, we ask every person to read what they wrote.

A premortem forces people to imagine the scenario of failure. It forces them to speak up about something that they might have imagined and didn’t speak up about. But mostly, it makes them [think] creatively about what could go wrong.

We are very good at explaining the past, we find reasons to explain why something has happened, [which is a postmortem]. We are much worse at imagining what could happen in the future. If we project ourselves in the future, where we have failed, and we try to imagine the past, which in fact is the future, we will be much better at imagining the future than we normally are. The premortem was invented by the psychologist Gary Klein and it’s very powerful. I have yet to meet a CEO who does not like it, who tried it and said it doesn’t work.

Q: I love this! I’ve asked my clients to think about what could go wrong at the present time, but projecting themselves into the future is way better.

A: If we’re about to decide [today] and the boss asks us to imagine what can go wrong, we say, “Nothing, boss, of course. We’re going to make this happen, right?”

(Next week: Decision-making in the family business)

Get “Noise: A Flaw in Human Judgment” at Fully Booked. “Noise” will also soon be available at National Bookstore. Queena N. Lee-Chua is with the board of directors of Ateneo’s Family Business Center. Get her book “All in the Family Business” at Lazada or Shopee, or the ebook at Amazon, Google Play, Apple iBooks. Contact the author at [email protected].