Sunday, June 27, 2010

Behavioural Economics and Organizational Intelligence

@cbcurran and @mkrigsman link behavioral economics and project failure. Michael calls this the IT failure domino effect : bias leads to poor decision-making and culminates in failed projects.

They talk about three behavioural factors that may affect project failure.
  • Decision shortcuts
  • Irrational value assessment
  • Emotional and social impacts

Behavioural economics challenges the conventional notion of economic rationality. So where does organizational intelligence fit into this debate? Does intelligence entail rationality? Let's look at each of these factors in turn.

Decision shortcuts

Chris lists three common short-cuts.
  • Using the cost of something else similar for comparison instead of knowing the actual value of something
  • Using “default” option as the best option
  • Using rules of thumb rather than understanding actual need
But using these short-cuts is perfectly compatible with intelligence. Indeed, in some complex situations, it may be impossible to reach a rational conclusion without taking any short-cuts, in which case the only intelligent course of action may be to jump to conclusions. (The passage of time from "Time for Understanding" to "Moment to Conclude" is not amenable to rational logic - see my presentation on Mastering Time.)

As I see it, the problem is not the short-cuts themselves, but the uncritical over-reliance on these short-cuts, and in some cases an apparent lack of awareness that a short-cut is being taken at all. Intelligent use of short-cuts calls for feedback and experimentation and learning, so that a set of effective and context-appropriate short-cuts are refined over time.

Irrational value assessment

Behavioural economics points out that people value things differently according to the way the choice is framed. For example, people may be unduly impressed by "free" offers, or may have an asymmetrical preference for avoiding loss, in situations that mathematical economists perceive as equivalent. Choices are often driven by a highly subjective notion of risk and reward.

In an intelligent organization, these effects may be moderated by an ability to articulate and share notions of risk and reward between multiple decision-makers, not relying purely on dry economic measures but understanding how these measures apply to real practical issues.

Emotional and social impacts

One form of emotional influence explored by behavioural economists is the so-called ego trap, which includes over-attachment to past decisions as well as over-confidence. When a situation becomes adverse (whether an investment or a project), it is psychologically easier to hope that the situation will sort itself out (for example, the markets turn positive, or the project gets back on track) than to reverse the original decision.

In organizational settings, there is a high transaction cost in changing your mind, and people who abandon previous commitments too quickly tend to be distrusted as fickle and unreliable. Furthermore, most projects experience difficulties at some stage, and if people didn't have some ego investment to carry them through these difficulties, no projects would ever be completed. So it is often better to work through difficulties than to cancel a project at the first sign of trouble. On the other hand, there are always going to be some decisions that made sense at the time, but are no longer viable under the changed circumstances.

Sticking to some decisions and changing others - this is incredibly hard, and is a test of character as well as intelligence. An intelligent organization doesn't have to suppress ego, but it needs to have a way of dealing appropriately and authentically with these kinds of issue, not only so that the right decisions can be reached more often, but also so that ventures into the unknown can be taken with the confidence that the downside risk can be contained.

See also: From Organizational Stupidity to IT Disaster

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