CEO Bulletin

I needed to hire a technical writer, and Larry (not his real name) had solid experience and proven capabilities in that area. On top of that, he was an Army veteran. That military discipline would be a real plus in this highly self-directed position. Lanky Larry, the lettered literary lieutenant, was my logical election. This decision felt very right.

As CEO, you’re making important decisions under a cloud of uncertainty all the time. You’re probably pretty good at it; after all, you’re running a successful business.

But you could probably be better if you had a little more knowledge about how you think about choices.

A few decades ago, Amos Tversky and Danny Kahneman started a revolution about human thinking. Michael Lewis captures their story in The Undoing Project: A Friendship That Changed Our Minds. Two of the numerous conclusions of Tversky and Kahneman were:

• Humans naturally develop cognitive biases or shortcuts – shortcuts that can sometimes lead to very poor choices.
• Humans tend to think in stereotypes or classifications which, again, can undermine solid decision-making.

In my personal experience cited at the beginning, I did hire Larry, and four months later we agreed it was not a good fit. It turned out that Larry was attracted to computer games the way a certain US president is attracted to a good brawl with the media. My technical writer was drawing a full time paycheck while working half time. My bias toward the discipline of the military had caused me to assume that Larry would be a self-disciplined worker. Had I done my homework, I could have learned otherwise in advance.

The research described in The Undoing Project provided the seeds for what has become known as behavioral economics. According to Stephen Dubner (co-author of Freakonomics), behavioral economics “combines the economist’s point of view that people respond to incentives, with the psychologist’s point of view that people don’t always respond rationally to those incentives.” And therein lies the rub.

How can you – or how do you – use behavioral economics as CEO? Two implementations come to mind immediately. Your personal decisions under circumstances of uncertainty (i.e., most of your decisions) are hindered by natural biases of the human brain, such as the two mentioned earlier. Being aware of this allows you to consciously look for your own biases any time you are making a high stakes decision (such as hiring someone).

The second implementation of behavioral economics is one I’ll bet you already use…at least some of the time. It has to do with marketing. It’s the challenge of seeing the world through the eyes of your customer or prospective customer when developing your marketing strategies. In so doing, you must recognize the inherent irrationality of people (your customers) under conditions of uncertainty (such as deciding to buy your product or service). This is particularly important in crafting your marketing message. Offering “the best” product may not be nearly so convincing as offering “the safest choice”.

While some of this may seem obvious, that doesn’t mean it’s easy. On the one hand, you run a business based on rational thinking. On the other hand, uncertainty often brings out the irrational – in your employees and in your customers – as well as in you! Recognizing where the irrational brain is operating is paramount.

We would all benefit if you are willing to share an example of where you were either tripped up by the irrational brain, or where you took advantage of the irrational brain. Why not take a minute and reply with your story?