Contagion in Decision-Making

Effective strategic decision-making is critical to the ongoing survival of any corporation or small business enterprise. However, contemporary decision-making seems to have been over-taken by social inclusion, that is, defensive adherence to prevailing thought.

Arguing the alternative option is often a career-killer, whereas submitting to pressure from authority figures to engage as a team player in the decision process is often a career enhancer. Yet history is replete with well-documented examples of where strongly arguing and influencing the adoption of the alternate may have saved the nation or the corporation from catastrophe.

Irvin Janis was one of the first researchers to investigate the phenomenon of ‘Group Think’.

Group Think is a constrained mode of thinking where the desire for harmony in a decision-making  group overrides a realistic appraisal of equally valuable or even better alternatives.

Are social networks ‘infecting’ intra-organisational behaviour and decision-making? Is decision-making itself contagious?

Evidently so, social inclusion is the driver of social networks and the number of social network connections one has (or claims to have) seems to be the only currency in town in some sectors of the community.

Finding comfort within the group and/or searching for recognition from the authority figure may help one’s career prospects, but when it comes to justifying ‘bad’ ideas (on which subsequent decisions are based) and taking cues from others can steer you and/or the company into a bad situation.

Take a look at the video clip ‘The smartest guys in the room’ which is about the Enron fiasco to see the consequences of a few ‘bad’ ideas (and subsequent decisions based on those ideas) taking hold in a major corporation – and with devastating effect.

If I remember correctly, a notable President stated: ‘This must never be allowed to happen again’!

Well, the GFC made the Enron fiasco look like a kindergarten picnic!

And, the ‘smart guys’, not only destroyed Enron, they destroyed the pension funds of thousands of small investors!

Where one sees colleagues rush toward a particular decision option, there is considerable pressure to join that rush and then justify the decision outcome post the decision process – that is until it all starts to come unstuck – then watch the inclusive decision-makers jump ship!

In other words, bad decisions are contagious! Not so, you think? Well here is a simple example taken from an everyday situation.

Let’s take a selection of financial metrics from a business simulation game which were generated by real people and do some simple analyses on what predicts share buy and sell decisions. The metrics included: market capitalisation, annual dividend, dividend yield, P/E ratio, market capitalisation, year low and year high share price.

What will we find in relation to decision contagion?

Well, we find that the predictor of the year high share price for the synthetic company is driven (i.e., statistically) by the last sale price and the share price change in the past week. In other words, individual share buy decisions are driven by the effects of others’ decision to buy the same shares – the consequence of which is to drive up the share price. But on the other hand, we find that the year low price is driven by decisions based on the P/E ratio and the dividend yield.

This example is based on synthetics data taken from real people making decisions in a business simulation game so is not rigorous science in action, but a simple example based on a synthetic market that exhibits reasonably well the contagion effect.

As the simulation share price rises relative to the overall share market movement, the greater the attention given to that particular share and the more other share traders are likely to be attracted to that share. However, the decision to exit that share (all things being equal) is influenced by share prices fundamentals like the P/E ratio and dividend yield.

Clearly one cannot also ignore the contagion effect that emerges in a declining market where there is a rush to the exit when a particular share tanks – but isn’t that the point.

Human nature has a tendency to seek the comfort of others when it comes to making decisions  – even more so when it directly impacts our personal and financial security.

The final point is: It is highly recommended that for important decisions, make sure there is someone who is willing (or assigned) responsibility for vigorously arguing the alternative option – and who fully understands that her career is not in jeopardy for so doing!

Disclaimer: The material contained is this post is general and is not intended as advice on any particular matter. No reader should act or fail to act on the basis of this example. The author has attempted to ensure accuracy and completeness of the information contained herein. However, no responsibility can be accepted for any errors and inaccuracies that occur.

 


4 thoughts on “Contagion in Decision-Making

  • Alan,
    I agree with both points. But don’t be shy to testing the underlying assumptions of the less valuable proposal – respectfully!
    Kenneth

    Comment from: Dr. Kenneth Preiss

  • While I agree it’s important to have someone who is willing (or assigned) responsibility for vigorously arguing the alternative option I also think it would help if those receiving alternative options actually listened to the ideas being put forward.

    If you’re in a staff meeting and someone is brave enough to propose an idea, listen to it. Take notes on it. Ask non-threatening follow-up questions. Questions that don’t require the person to do extra work or imply in any way that the idea is stupid. Thank the person for their input. Then actually consider the suggestion.

    Comment from: Alan Stewart

  • Michael,
    Many of the main street corporations and academic institutions I have worked in around the globe are, to some degree, affected by this condition. The higher up one is in the organisation, the more pressure there is on these higher level people to ‘…take one for the team….’ when they disagree with what appears to be a suboptimal decision about to be made! Often CEOs don’t brook dissent! Conversely, highly innovative organisations demand dissenting views. Apple is a classic case of the latter and look where it got them. You may well find writings about the Apple culture and Steve Jobs’ interpersonal style a most interesting and worthwhile read.

    Comment from: Dr. Kenneth Preiss

  • Tis a brave strategy but one worth considering.

    I have never been in an organisation that embraced this culture.

    Have you ever had a real life example of this happening in a company you have been involved in?

    Comment from: Michael Rao

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