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Business Leaders Beware: Too Much Information Can Kill Decision-Making

Business leaders around the world are faced with dozens, if not hundreds, of decisions to be made daily. The more an organization grows, the more frequent and complex the decision making process becomes. Each decision can lead to major profits or to the worst disasters. How can a business understand what information and data should be valued the most? Who should a business talk to in order to help the board make these important decisions?

For business leaders and entrepreneurs, wrong decisions are always looming, and even some of the most successful businessmen have had to experience the repercussions. It’s important to find ways to make the tough decisions and to make them with all the information accessible, but sometimes, that is just not enough. During certain instances, too much information can lead to a nightmare and kill the decision making process.

In 2012, psychologists from Princeton and Stanford University did a fascinating study, titled On the Pursuit of Useless Information (0). One of the experiments was simple but extremely brilliant. The psychologists divided their participants in two groups. Group A read the following:

“Imagine that you are a loan officer at a bank reviewing the mortgage application of a recent college graduate with a stable, well-paying job and a solid credit history. The applicant seems qualified, but during the routine credit check you discover that for the last three months the applicant has not paid a $5,000 debt to his charge card account.”

The question to these participants was simple: ‘Do you approve or reject the mortgage application?’

Groupe B read the exact same paragraph with one crucial difference; the amount of the student’s debt wasn’t mentioned. Instead, they were told that there were conflicted reports and that the size of the debt was unconfirmed, either being $5,000 or $25,000. The participants had the choice to approve or reject the applicant immediately, or they could delay their decision until more information was available. The majority of Group B’s participants chose to wait until they knew the size of debt.

The experimenters then revealed to Group B that the student’s debt was only $5,000. In the end, 71 percent of Group A participants rejected the applicant, compared to only 21 percent of Group B. With these differing outcomes, we can see that access to information often changes the outcome of any situations, and this applies to all businesses.

In this context of uncertainty, businesses have to be able to ‘power sound decisions’ (1), which is the tagline of one of the world’s most well-known global valuation and corporate finance advisor firms. Duff & Phelps specializes in ‘delivering peace of mind’ to its clients who can sometimes be lost in an ocean of data. Duff & Phelps works with boards and directors to empower them in any decision making process. “Our clients are typically the executives, C-level executives and board members; so you can imagine how demanding they can be,” says Yann Magnan, managing director at Duff & Phelps. “They are under a lot of pressure to make the right decisions and they expect us and our managing directors to be able to help them making these decisions.”  And to make a difference in the decision making of its clients, Duff & Phelps’ experts base their approach not only on data but on predictions and precise analyzes that run independently. “The regulations and the complexity of the financial world is at the basis of what we do”, said Magnan.It is our mission to deal with the increasingly complex requirements, all the time. We have industry experts and we are organized within 5 industries. Our managing directors and consultants have significant expertise in each of these industries”.

And with Big Data entering the equation, “managers can measure, and hence know, radically more about their businesses, and directly translate that knowledge into improved decision making and performance,” according to Andrew McAfee, co-director of the initiative on the Digital Economy in the MIT Sloan School of Management (2). McAfee further explains: “managers can allow themselves to be overruled by the data; few things are more powerful for changing a decision-making culture than seeing a senior executive concede when data have disproved a hunch”.

Yet, false certainty and too much data is more than present in our daily lives. That’s how the concept of INFObesity emerged, whose name is self-defining. Sam Horn, communications Strategist and author, explains that INFObesity in our daily lives lead to what she calls ‘Brain Freeze’ the shutdown of our brain “when fire-hosed with facts” (3).

“I define the need for false certainty as trying to think through every possible issue before committing a change. It strikes me as being like trying to predict the weather in 1 years time without any data,” states Simon Taylor, writer for ‘Making Innovation Work’ (4). He takes the example of banks in this time of false certainty and analyzes how a bank’s decision making process is ruined by uncertainty. “A bank reacts to things it doesn’t know or understand by setting up committees, and spreading responsibility to various experts who all have to weigh in,” he says. “As a result nothing gets done without going to 5 different committees and involving hundreds of people. Everyone involved bemoans the bureaucracy, but there is no way around it. This leads to slow decision making and makes innovation look an awful lot like risk.”

And in order to avoid this trepidation during decision making, business leaders from all industries have to look at data differently and have to remember that, if the same data can lead to two drastic opposite decisions then it’s time to get advice from an independent advisory firm that can get you the right information and truly aid in that process. As McAfee points it out, “the evidence is clear: Data-driven decisions tend to be better decisions. Leaders will either embrace this fact or be replaced by others who do. In sector after sector, companies that figure out how to combine domain expertise with data science will pull away from their rivals. ”

References:

(0) On the Pursuit of Useless Information, American Psychological Association, Anthony Bastardi, Eldar Shafir, 2012

(1) Duff & Phelps, U.S born companies created in 1932, now premier global valuation and corporate finance advisor

(2) Big Data: The management Revolution, Andrew McAfee and Erik Brynjolfsson, Harvard Business Review, October 2012

(3) Are you spreading INFObesity? Sam Horn, June 19th 2015

(4) Banks can’t have innovation because? False certainty kills it, February 1st 2015, The Innovation Blog, Simon Taylor

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