When we make decisions and take our choices, the basic mechanism is a comparison. We compare suppliers, scenarios, RoI and so on. Even if we lack others to compare with, we will imagine what a good and bad supplier might be like to compare with. Prof. Tom Saaty demonstrated how good we are at that sort of thing. Then we think about the risks, so weather, politics, marketplace and similar; all the things we find in a typical risk register. Layer in the psychology of the decision-makers and we have risk-taking and optimism bias. Optimism bias means we tend-to underestimate time and budget (by about 30% each), because we are over optimistic about what it takes to get things done. Now we get to the least talked about character trait, gambling.
By observation, many executives and entrepreneurs believe they can always beat the odds. In some cases, horse racing for example, there is a component of skill involved and the same for card games. In many other cases, there is no more skill than the spin of a roulette wheel. What does this mean overall? It means leadership often has an unshakable inner-belief that they are always going to win. This inevitably leads to a false sense of security, and preparedness to take-chances that are wide-open to factors outside their control. Leaders are generally very good at filling in the gaps of incomplete information, that’s experience and character type. Yet, I have seen three instances over the last five years were despite doing the research, fundamental business decisions were made with a scant understanding of their new marketplace or customer behaviour. In two cases those larger businesses failed, catastrophically, because they disbelieved what their research told them. “It can’t take that long to build a factory!” for example. They totally misjudged the culture of the countries where they relocated to, and paid the price.
In many respects, these few paragraphs encapsulate why governance frameworks and operating models are critical to business survival, they help to avoid “betting the business” on a decision, as described by Prof. Bob Garratt in his various books on the subject. Its no longer just about finance and the bottom line, there are so many other factors involved that without that detail, leaders will tend to fill the gaps, too often with downside not the upside everyone expected.