In Like We Trust

A recent research report [1] suggests that an ethnically diverse group is better at making decisions than a group that are all alike. These results build on other studies that show that diverse groups in general are better at making decisions [2]. Irving Janis, who first identified the concept [3], argues that ‘homogeneity’ is one of the key prerequisites for Groupthink, which is a bad outcome. So all we have to do to prevent Groupthink is to insist on diversity, especially at the Board level?

Whoa, hold on, it is not as easy as that! It turns out that  it doesn’t come down to ‘diversity’ per se but ‘Trust’.

Trust
Trust is axiomatic in business. We need to place some level of trust in other people simply because not every action can be covered by a legally watertight contract. We especially need to trust our colleagues – those in our team, in our business unit and particularly in the boardroom. But it turns out that, at least initially, we tend to trust people who are like us more than people who are not like us, such as different in sex, color, educational background, age, social group, etc.

This, of course, makes some sense, as in decision-making terms it is a useful ‘heuristic’ that allows us to quickly ‘cut to the chase’. If someone is ‘like us’ we assume that a lot of assumptions can go unsaid, since there is some level of common ground and thinking. For example, if I am talking to another IT geek I don’t need to explain terms such as ‘website stickiness’ but may need to explain such concepts to an accounting or operations colleague. In this case, I trust the IT geek to understand what I mean; but, of course, that trust may well be misplaced.
Friction
It turns out that diversity creates ‘friction’. For example when someone says, ‘hold on, I don’t understand that point, please explain’. In some settings, such friction is an anathema and is treated as a reason to exclude the ‘squeaky wheel’ from serious debates. Where collegiality is the goal, friction quickly becomes the enemy. But collegiality is important, it helps to get stuff done and things run more smoothly if everyone is on the same page. However, as theory and experiments show, cosiness doesn’t always produce the best outcomes for shareholders [4].
Decision-making Dilemma
So in making decisions, especially strategic ones, we are faced with a real dilemma. We want to obtain the best decision we can but we cannot let the process run forever – we need to make a decision! Now we can ignore this dilemma or we can tackle it head-on.
One way, as the study suggests, is to actively promote diversity, which in itself is a socially good thing to do. But that assumes that new recruits will always stay different to us.  However, after a time,  they will probably become more and more like us and we will be forced to go back to square one. After a time there may be diminishing returns to such a strategy as everyone, no matter how talented, has a learning period when they are less than fully productive.
The Problem is not You, it’s Me!
Instead of searching for others that will change our thinking, maybe taking a long look in the mirror might be appropriate and asking the question – am I questioning enough? How do I react when questioned about my reasoning? Can I justify my own assumptions? Am I biased? Can I supply the diversity to an important debate?
But while such a thoughtful approach is very useful, if only to ensure that the individual (the salespersons, CEO and Chairman) is doing the best job they can, it is by itself not sufficient.

In order for judgements and decisions to be questioned there must be a level of transparency. What are the assumptions upon which debate was based and what is the logic/rationale for making the decision that was eventually made?

One way to achieve a level of transparency is to have a formal decision-making process that covers not only ‘visible’ factors (such as costs, timeframes, competition etc.), but also the ‘invisible’ factors, such as the unstated assumptions and the biases upon which the decision was based? For example, a classic bias that can sink any company is the ‘confirmation bias’ sometimes known as the ‘sunk cost fallacy’. The (incorrect) logic here is – this decision builds on a previous decision, so it must be right! What may in fact be needed is a small kid (or intelligent outsider) who can point out that the ‘King has no clothes’.

This begs the question for a board director or senior manager – who do I trust? Someone who agrees with me or someone who (has the courage to) disagree with me? The real problem then is not you, it’s me! As usual the Greeks were there ahead of us – (in business first) Know Thyself!
People Risk Management
The risk that an employee or group deliberately or inadvertently makes a bad decision is a People Risk as it can lead to significant losses even the bankruptcy of the firm. This blog is one of a planned series that will discuss facets of People Risk in general and Decision-Making in particular. It is obvious that managers and assurance functions, such as Risk Management, Audit, Compliance and Human Resources, must understand the concept of People Risk, particularly the influence of individual and group biases on decision-making, because badly-made decisions may result in significant damage to the firm.
References
[1] See Levine et al, 2014, ‘Ethnic diversity deflates price bubbles’, Proceedings of the National Academy of Sciences available at http://www.pnas.org/cgi/doi/10.1073/pnas.1407301111
[2] For example, Herring C, 2009, ‘Does Diversity Pay?: Race, Gender, and the Business Case for Diversity’, American Sociological Review, 2009, VOL. 74 (April:208–224)
[3] Janis I., 1971, ‘Groupthink: The desperate drive for consensus at any cost’, in The Classics of Organisational Theory, (eds. Shafritz J. M. and Ott J. S.) Wadsworth
[4] See for example McConnell P. J. (2013) ‘Northern Rock – The Group That Thinks Together, Sinks Together’ Journal of Risk and Governance (2013) Vol. 2/2

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