Why do smart people make bad decisions?

Why do smart people make bad decisions? This is a question I have been puzzling over for some time. And I’ve arrived at a few conclusions.

By ‘bad decisions’ I don’t mean minor missteps about hiring the wrong person, choosing the wrong location for a business, or backing a single failed product.

Nor am I talking about entrepreneurial decisions that are not successful. The single individual driving through a high-risk vision for the future which is largely a leap of faith is a key driver of innovation.

What I’m interested in are the really ‘car crash’, empire-collapsing decisions. Those that cost the company millions, if not billions, of pounds, leaving behind brands and reputations that are desperately tarnished, sometimes irreparably.

And by ‘smart’ people I am referring to those who are universally recognised as being well educated and being intellectually bright.

But how do you identify a bad decision? Can it be spotted at the time it’s taken, or only in the benefit of hindsight? Is there such a thing as a bad decision, or are there only just bad outcomes? Can you make a ‘good’ decision that has a bad outcome? Can you make a ‘bad’ decision that has a good outcome?

Well, I think you can by separately evaluating the quality of the decision making from the outcome. That there is a difference between good and bad decision making which is separate from the actual outcome of the decision.

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Tell-tale signs of a ‘bad’ decision

We know that every day, in organisations (and governments) around the world, smart people are making poor choices. And some of these will wind up being catastrophic.

Often, they destroy lives in the process. Take the UK’s Post Office scandal, where a faulty accounting system resulted in the wrongful prosecution of 732 sub-postmasters for theft, accounting and/or fraud.

Described as the most widespread miscarriage of justice in British legal history, the company’s former CEO and board have been heavily criticised for being “asleep at the wheel”. Inquiries are ongoing.

A ‘bad’ decision is one where the chances of achieving your desired stated outcome, with the decision you are taking, are low to non-existent due to poor information, planning, or execution. Crucially, this was all evident at the point in time when you made the decision.

A ‘bad’ decision is not about the outcome. The business environment we operate in is too complex, variable, and ultimately chaotic for anyone to guarantee positive outcomes. But you can reduce your chances of making a bad decision.

One way is to have the idea challenged and assessed by two groups of people:

• Those experienced in the area under discussion, and

• Equally importantly people with an outside and diverse perspective who can ask the ‘stupid’ – often valid and important - questions.

Those with slightly longer memories know the industry is littered with examples. From costly attempts to build bespoke technology platforms (doomed to failure) and the ‘pass the parcel’ LMX spiral to the finite reinsurance and contingent commissions scandals of the Spitzer years.

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The five Cs

In its study of the root causes of 20 major corporate crises, Airmic’s ‘Roads to Ruin’ pointed the finger at – among other things – board ‘risk blindness’, poor leadership on ethos and culture, defective communication and risks arising from inappropriate incentives.

Some of the reasons why organisations enable smart people to make bad decisions can be summarised under five broad headings – the 5Cs:

• Culture

• Conformity

• Capability

• Complicity

• Consequences

​Culture

The single biggest determining influence on how decisions are made in any business is the culture of that business. That culture is set by the leadership and management style of the chief executive and its board.

Boards are supposed to carry out the role of counter-balancing executive management teams, but very often fail to do this effectively due to a combination of all 5Cs.

Conformity

It’s difficult and stressful to challenge others’ decisions, especially if that person is your senior. There is huge group peer pressure to conform, and it is part of our basic human psychology to want to be accepted. Agreeing with others is part of the acceptance process.

It is hard to object on a complicated business decision when everyone around you is acquiescing. Where being on the board carries a lot of status. It’s much easier to stay quiet and abrogate your own personal responsibility to the ‘group’.

Capability

Boards may be packed full of ‘smart’ people, but smart does not equal ‘capable’. Nor does it imply experience in the matters that are being decided upon.

Too often we come across boards who are full of ‘smart’ people but lack experience in the activities of the group of which they are directors.

Complicity

Sadly, it is often the case that smart people make bad decisions in the full knowledge these are poor choices. For various reasons they push ahead regardless until disaster strikes, mainly because they judge the personal implications for themselves to be too great if they stopped and challenged the status quo.

Consequences

Often there is a perceived lack of consequences for making bad decisions. In fact, the penalty for a catastrophic failure is, at worst, a significant pay-off for those in charge.

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Countering the 5Cs

There are many antidotes to the 5Cs, but here are some obvious areas to begin with.

First, it is important to consciously create a culture where very important decisions can be appropriately challenged, by both the experts and a more diverse set of people who see the world through a different lens. Ask:

• How effective are your boards and executive teams at challenging, in a constructive way, the assumptions behind big decisions?

• Have you got the right mix of people with the right experience on those boards to assess the decisions?

Tackle conformity by asking: How much diversity do you have on your decision-making bodies to look at the decision from different perspectives?

Do you have the right gender mix, geographic and cultural mix? Or are you just pale, stale, and male and stuck in groupthink?

Most of all, foster environments that actively encourage, facilitate, and reward those who challenge while ensuring there are appropriate consequences for decision-makers who knowingly make poor choices.

And perhaps redefine your definition of the word ‘smart’. The past two years have offered up plenty of surprises. Those who have risen to the challenges presented have often been those who were previously overlooked or underestimated.

We are in a new world now and we need plenty of capable hands.