A new white paper released by behaviour change experts Decision Design has found just 60% of decisions made in businesses are ‘good’, meaning businesses are leaving 40% growth on the table.
Decision Design surveyed more than 1000 decision makers at Australian businesses, and found decision-making was central to what organisations do, and the better the decision, the better the outcome.
“This research has found that our hit rate of decision-making was only 60%,” Dr Johann Ponnampalam, founder of Decision Design, says. “So, when you factor that this is something that’s extremely important, and it has a failure rate of 40% and it lacks the commensurate focus and investment, it’s really ironic.”
Decision Design’s research found that poor decisions made by leaders led to increased business costs (58%), a loss in profit (40%) and a drop in sales (35%). Decision quality issues could also lead to loss of customers, decline in employee engagement and retention and business processes becoming less effective. And, it found that fixing these decisions through behavioural decision processes could increase economic output by 40%.
“Humans were not designed to make complex decisions,” Ponnampalam says. “We were designed to make far simpler, more fundamental decisions, which are ultimately about survival, reproduction and basic co-operation. Our bandwidth for processing information is really quite tiny. It’s not for lack of trying, we just weren’t designed to do what we’re tasked with.”
Overconfidence in decision-making
Alongside that, Ponnampalam says the research found overconfidence of leaders, which stems from a natural drive, also leads to poor decision making.
“We tend to be overly optimistic about the future of this decision that we’re about to make.”
Post-Banking Royal Commission, Ponnampalam says consumer trust emerged as a key issue. As a result, companies in the sector focused on transparency, but psychologists say the trust individuals form with companies comes down to four factors: capability, reliability, integrity and benevolence.
‘”Diversity improves decision making, but if the process in which you share information isn’t controlled, you could negate the benefit, because you’re just polluting that process.”
Dr Johann Ponnampalam, founder, Decision Design
“And I don’t think companies were thinking about those last two factors,” he says. “So, if you take those four pillars, you’re not necessarily trying to achieve transparency, you’re trying to prove to customers that you are trustworthy.
“And this is the problem facing financial service providers and grocery retailers right now. They know they need to up their trust, their folly is being overconfident with their ability to execute, and leading with the presumption that trust is transparency.”
There’s also a tendency to seek out, notice and recall information that supports our existing beliefs, and a tendency to avoid taking risks because of a fear of loss.
The solution
Ponnampalam says developing decision technology that goes with the grain of psychology, rather than against it, is key.
Certain strategies, like pre-mortems, which are discussions that consider what could go wrong after a decision is made, can also be helpful, as well as embracing diversity of thought by controlling the way information is shared.
“Groupthinking, which is where groups discuss things together, can be a problem, because it can correlate our error. The most effective way to be accurate is to ask everyone to make a private decision, and collect all the individual decisions and take an average,” Ponnampalam says. ‘”Diversity improves decision making, but if the process in which you share information isn’t controlled, you could negate the benefit, because you’re just polluting that process.”
And don’t be afraid to take a few risks.
“During times of transition and recalibration, businesses often rely on familiar strategies for stimulating growth, like boosting sales, trimming expenses, streamlining operations and seeking funding. However, it’s essential that organisations also explore non-traditional avenues to maintain agility and competitiveness.”
Ponnampalam points to a time when a major life insurer client identified a trust gap in perception and reality of claims payments. Claims were paid out 90% of the time, but consumers thought they were paid out only 60% of the time.
“That’s an enormous gap in perception and reality, and it plays out in disgruntled customers, who tend to cancel their policies. One of the interventions we tried was taking the pillar of benevolence and executing authentic acknowledgement – it was quite literally a message from the CEO about the trust gap, acknowledging it exists, and being explicit about what they’re going to do about it.”
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