Have you ever experienced a time when a decision you made did not results in an ideal outcome? Often in business a decision is measured in terms of outcomes. What was the result that arose from the particular decision. In viewing decisions in hindsight we do not allow for the uncertainties that existed at the time. In a very good example of this experimenters gave experienced senior managers outcome scenario’s from a case study and asked them to predict the likely outcomes. Lets say the results were outcome A – 40%, B, 35%, C 25%.
A second group of senior managers were given the case study AND the outcome. They were asked to assess the probabilities for the different scenario’s irrespective of the fact that they knew the result. They needed to see the problem as it existed at the time and not be influenced by the subsequent result. Of course in hindsight their estimates were far different as it was “plain to see that option A would be the most likely result”.
Again lets say they awarded Option A – 65%, B 20% & C 15%. The only difference between the two groups was that one group had the luxury of knowing what happened and this affected them in a way that made things “self-evident” that were not as clear at the time.
The hindsight bias is often referred to as the “I-knew-it-all-along phenomenon.”
After the GFC many CEO’s were sacked for their firms poor performance. Whilst some of these may have been justified I wondered how many were the victims of hindsight bias or perhaps they were just scapegoats?
In many aspects of business we are like a captain of a ship – the oceans play a bigger role in determining speed, direction and progress than the skipper. The skill of surviving the difficult storms is still to be valued along with the capacity to find the winds that will support speed towards your destination. Just don’t get too caught up in how skilful a skipper you may be as a headwind and bad weather may be about to hit.
For more on this topic read http://hbr.org/2010/12/column-good-decisions-bad-outcomes/ar/pr an article by Dan Ariely where he makes a number of suggestions to assist in combating hindsight bias;
1. Document crucial assumptions. Analyse a manager’s assumptions at the time when the decision takes place. If they are valid but circumstances change, don’t punish her, but don’t reward her, either.
2. Create a standard for good decision making. Making sound assumptions and being explicit about them should be the basic condition for getting a reward. Good decisions are forward-looking, take available information into account, consider all available options, and do not create conflicts of interests.
3. Reward good decisions at the time they’re made.Reinforce smart habits by breaking the link between rewards and outcomes.
Our focus on outcomes is understandable. When a company loses money, people demand that heads roll, even if the changes are more about assuaging shareholders than sound management. Moreover, measuring outcomes is relatively easy to do; decision-making–based reward systems will be more complex. But as I’ve I said before, “It’s hard” is a terrible reason not to do something. Especially when that something can help reward and retain the people best able to help you grow your business.
Another article that may be of interest is an article by Paul Goodwin on hindsight bias as it effects forecasting.