Sydney Finkelstein's new book Think Again identifies four biases that lead otherwise savvy managers astray. Cases in point: Dick Fuld, and Stanley O'Neal
Why do smart, powerful executives make really dumb decisions? Like, say, doubling down on the subprime mortgage market despite ominous signs that the real estate bubble was about to burst?
Arrogance and greed are to blame, sure. But if you ask management guru Sydney Finkelstein, there's more to it than that. Finkelstein, author of Why Smart Executives Fail and a professor at Dartmouth's Tuck School of Business, believes that bad decisions stem from the way our brains are wired. His new book, Think Again, slated for release in January, delves into the complex world of neuroscience, a hot topic these days. But while much ink has been spilled on neuroscience and how it relates to investment decisions (buy, hold, or sell?), Finkelstein feels that few have applied the emerging science to management decision making.
After all, the current economic mess we're faced with has its roots in what are, in retrospect, some pretty horrendous decisions made by CEOs such as Lehman Brothers' Dick Fuld and Stan O'Neal of Merrill Lynch. What led these seemingly brilliant men to make such lousy calls? Finkelstein has identified four internal biases that often lead to bad decisions: inappropriate prejudgments; inappropriate experience; self-interest; and attachments.
The first two are the most interesting. Prejudgment happens when we choose a course of action and ignore any advice or information that does not hew to that predetermined path. (The lead-up to the war in Iraq comes to mind.) Inappropriate experience, meanwhile, is basically a "What worked before will work again" attitude that's unfortunately quite common in executive boardrooms. It helps explain why financial firms got more and more enmeshed in subprime loans and collateralized debt obligations. "It's not just arrogance—they do these things because they were right before," says Finkelstein. "But it becomes dangerous when you do not heed the warning signs."
Lehman's Fuld, Finkelstein argues, perfectly encapsulates the experience bias. "He was unable to break out of his own experience and history by seeing the risks that Lehman had," he says. That puts him on Finkelstein's list of the worst CEOs of 2007, a group that includes the recently ousted Ken Thompson at Wachovia (WB) and Kerry Killinger at Washington Mutual (WAMUQ).
Surprisingly, though, Finkelstein's nominee to head that ignominious list doesn't hail from Wall Street. Instead, it's Jerry Yang of Yahoo! (YHOO), who, Finkelstein argues, cost shareholders billions by stubbornly holding out for a better deal from suitor Microsoft (MSFT), which then walked away from the table. In that situation, the bias Yang displayed was attachment to the company he helped create and last year stepped back in to save. Microsoft's Steve Ballmer, meanwhile, wins kudos from Finkelstein: "He was smart to walk away, and he's not given sufficient credit."
What advice does Finkelstein have for managers coping with the downturn? Rather than hunker down, he thinks they should act boldly. "People are more willing to accept change during a crisis," he says. "This means it's an opportunity to make hard changes that you need to make that may have been resisted before." Just check those biases at the door before you do.