Making decisions in family businesses

(Last of four parts)

Management professor and consultant Olivier Sibony wrote the book “Noise: A Flaw in Human Judgment,” with Nobel economist Daniel Kahneman and policy adviser Cass Sunstein. We conclude our chat—exclusive to the Inquirer—with him here.

Q: A Filipino founder of a family business said that his kids made it to the top US business schools, and they asked professors to be consultants for their enterprises here. The father said fine, bring them here, let’s have a discussion. Afterwards he said it was such a waste of time, because it muddled the entire situation, and they ended up making the wrong decision, which cost the company money. Is this an instance of noise?

A: What actually is a good decision? Can you say that because it cost the company money, it was a bad decision? I’m not so sure. You’re in business, you’re not running an aircraft, you’re not taking zero risk. If you take risks, you’re going to sometimes fail. That doesn’t mean that your decision was a bad one. Now, of course, in hindsight, most people will say, it was a bad decision because it cost us money. But that’s actually not a smart way to think about decision-making. If you want to be rational, you need to distinguish the quality of the decisions from the value of the outcomes. You can have a bad outcome to a good decision. You can also have a good outcome to a bad decision. It’s called being lucky.

We should evaluate the decision by the quality of the process by which it was made. Of course, over many decisions, we should also look at the results. As Churchill used to say, however brilliant the strategy, you should occasionally look at the results. So if you’re always failing, there is a problem. And if you’re always successful, you’re probably a pretty good decision-maker. But when evaluating one’s decision, it’s hard to tell whether the decision was right, purely based on whether it was successful. Perhaps the consultant did a terrible job. But in principle, having someone who makes sure—without necessarily knowing much about the business or the decision at hand—that you have a disciplined process that reduces bias and noise, could be very helpful. We call this person a decision observer, whose job is to literally observe the way the decision is being made, and to basically use a checklist of the biases and say, it looks to me like I’m seeing ‘groupthink’ or confirmation bias, and redirect the decision-makers to try and eliminate it. The same would be true of noise.

Bringing in an external consultant against the wish of the ultimate decision-maker never works. Imposing an outsider on someone who in the end, wants to make their own decision, is a waste of time and money. The consultant should simply not accept that job unless it is the ultimate decision-maker who is calling for help.

Q: I asked the patriarch why they got the consultant. He said, to please my kids.(My son Scott, who has a master’s degree in economics, joins our chat.)

Scott: “Noise” seems like a book in the same genre as Kahneman’s “Thinking Fast and Slow,” Sunstein’s “Nudge” and other decision science books. When I learned about cognitive biases in “Thinking,” it introduced them to me as problems on a personal level, for me as an individual, which we then scale up and apply to organizations. But noise, as you said, is a problem of organizations, not of individuals. What happens when you try to apply it to personal decision-making? Is that something that can or should be done?

A: For that, my other book “You’re About to Make a Terrible Mistake!” talks about how, individually or in an organization, you can actually operationally combat the biases that Danny [Kahneman] talks about. It’s a synthesis of his research, and of the practical work I do in companies trying to help people make better decisions. The book culminates in a compendium of 40 different techniques that individuals and teams can use to improve their decisions and combat the biases, of which I’ve just given you examples—the anonymous poll, the premortem (check out parts 1 to 3 of this series)—a few out of the 40 that are in that in that collection. INQ

Get “Noise: A Flaw in Human Judgment” and “You’re About to Make a Terrible Mistake! How Biases Distort Decision Making and What You Can Do to Fight Them” at Fully Booked. “Noise” will soon be available at National Bookstore.

Queena N. Lee-Chua is on the board of directors of Ateneo’s Family Business Center. Get her print book “All in the Family Business” at Lazada or Shopee, or e-book at Amazon, Google Play, Apple iBooks. Contact the author at [email protected].