Research from Professor David De Cremer says that the worst thing you can do is believe your own hype.
When Indian family-firm Keva (formerly SH Kelkar) floated on the Mumbai stock exchange it meant changing more than simply ownership. “Some of our senior team members were reluctant to shift to new suppliers in case of non-compliance with international safety standards. Their preference was to stick with our traditional suppliers or raw materials,” explains Maurits van Kolck, global head of regulatory affairs at Keva. “But some of the locally-sourced raw materials were not up to the desired standards and, while we found an alternative, production declined. We convinced the team that sticking with the traditional raw material was not the best decision – not just for moral reasons but for the long-term interests of the company – and got them to change their mind.”
Keva’s senior team were gripped by irrationality – and in similar circumstances, so are the rest of us. In fact, it’s when you assume that every decision you or your team make is rational that the real problems begin, says behavioural scientist and Cambridge Judge Business School Professor David De Cremer. “So many business decisions are supposed to be taken rationally that business courses have started to show irrationality is a freak of human nature,” he says. “But it is not a freak. Irrationality might affect only five per cent of the decision-making but that tends to be the crucial five per cent, when people have to act or react quickly.”
Irrationality can derail a company because managers do not take it seriously, says Professor De Cremer. “In most economic models there is a rational eloquent paradigm,” he says. “It assumes that behaviour follows the logic of maximising self-interest and is not influenced by people’s personal preferences and emotions. But if that assumption is wrong, it is a flawed model for the function of the business. The issue is not whether we are irrational – because we are. We wouldn’t need ethics guidelines if we all automatically acted reasonably as we know what the rules are. The issue is how to recognise our biases and manage them. It’s vital to look at ourselves as individuals to examine the internal and external factors that drive our behaviours and decisions. Many of us perceive ourselves as rational beings, even when we are acting already irrationally.
The key to the types of executive education programmes run by Professor De Cremer is to use people’s ability to reason to understand how irrational factors make us act correctly – or wrongly – depending on the situation, he says. “Too many executives are so concerned with being competitive that they prize winning an argument over making the best decision for their organisation.” It’s these emotions, he argues, that invite irrational decisions.
Daniel Flückiger, a former banker, is acutely conscious that emotion clouds his judgments as head of social services at Swiss care provider Social Service Oesch-Emme. “In social work, decision-making is all about how we handle our feelings. It’s vital for us to be touched by what we see and hear so we can understand a client’s situation. But we have to make decisions rationally – and that can be quite a conflict.” As such, we need to teach people to understand their own irrationality but then in a rational way.
Flückiger says the key is having an honest team: “We talk very frankly – I know their blind spots and they know mine and my staff are able to tell me if I am employing certain biases.”
Building that effective team rationally can only help reasoned decision-making, says Professor De Cremer. “It’s easy to appoint only people who agree with you on everything,” he adds, “but if you choose people with only one viewpoint you will get only very filtered opinions. And because they’re all saying the same thing, you irrationally assume they are right.”
“My business background taught me to live and breathe rationality,” says Denise Scarpelli, international senior marketing manager at information network specialists Legrand. “But I was irrational – I mirrored other people rather than having the confidence to be authentic. My biases affected my judgment.”
Scarpelli has also suffered others’ irrationality. “At a previous job a colleague was hostile, believing I would do the things that had annoyed her about my predecessor. She had her own script – as we all do. But I solved it not with confrontation but by leading – not telling – her into understanding the way I worked would be different.”
Professor De Cremer is keen to stress that the potential for flawed judgment is not confined to financial or operational decisions. “Understanding your approach to leadership – in both rational and irrational ways – will eventually lead to motivating your people, rather than simply controlling them,” he says. “Rule-based management systems – where this kind of thinking is absent – give only an illusion of control and risk staff taking no responsibility.”
Flawed, biased judgment and how to avoid it is one focus of Cambridge Judge’s programme Leading in Value-driven Ways, led by Professor De Cremer as part of the Cambridge New Leadership Certificate of Achievement. Self-reflection is key, he says. “We all have our weak points and they are all different. For example, we agree it’s not okay to cross the line but some might think it’s all right to push the boundaries – and others might think if you’re pushing the boundaries then you’ve already crossed the line.”
“The programme has taught me how to step out of a situation, look rationally at it and step back in again,” says Flückiger. “I have also learned not to delay decisions – my work is a world of so much irrationality from clients, carers and agencies that there is rarely a stable situation.” For van Kolck, it was all about learning how to move an organisation from local to global.
The message is clear, says Professor De Cremer: accept that irrationality is in everyone, including yourself, and learn to manage it. “Adam Smith’s Invisible Hand suggested pursuing your own self interest will result in the common good,” he says, “but this only works if everyone acts rationally and knows that others will do so as well. Since in reality this is not possible, good leaders are aware that such irrationality exists and therefore will always affect your judgment. So although we like to believe that business is based on rational thinking, the sooner we realise we are all unpredictable, the better.”