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McKinsey Quarterly - Seeing through biases in strategic decisions
McKinsey Quarterly Seeing through biases in strategic decisions Author:Various McKinsey Quarterly is the business journal of McKinsey & Company. Our goal is to offer new ways of thinking about management in the private, public, and nonprofit sectors. We aim to help business people run their organizations more productively, more competitively, and more creatively. — Quarterly articles, written by McKinsey c... more »onsultants, offer practical ideas based on the firm's experience with the world's largest companies and on proprietary research and close ties to academic institutions.
Seeing through biases in strategic decisions
Most will agree that we do not make calculated, rational decisions all the time. Time pressure, uncertainty, and simple pragmatism lead us to base many decisions on our judgment. We decide with our head, but also with our gut and for good reason. Such behavior has profound implications for the way we manage companies. This issue of McKinsey Quarterly views those implications through the lens of behavioral economics a field that highlights the limits of rationality and has gained traction among practitioners in areas ranging from finance and marketing to public policy.
The application of behavioral economics to strategic decision making, however, has been more limited, and it is this gap that the issue s cover package seeks to address. Our approach is based on a simple premise: since strategic decisions are made by human beings, and since human beings are subject to known, inescapable biases, companies should recognize these biases rather than ignore them and should engineer strategy formulation processes that mitigate their effects. We call this approach behavioral strategy and describe a number of techniques companies can employ to adopt it. Then three prominent executives Sir Martin Sorrell, Randy Komisar, and Anne Mulcahy candidly discuss their decision-making styles and how they have designed decision-making processes to their advantage but also warn readers about the risks of overengineering those processes. Finally, Nobel laureate Daniel Kahneman and cognitive psychologist Gary Klein debate a question that is part science, part philosophy, but all business: When can you trust your gut?
Behavioral economics, and the growing understanding of human psychology that underlies it, have found applications across the whole spectrum of business. Also in this issue are practical tips for marketers intent on understanding consumer biases, a case study on using behavioral science to improve the customer experience in service operations, and an interview with Stanford s Chip Heath on the behavioral science of change management.« less