How to avoid catastrophic decisions

We make thousands of decisions each day. Some are small and insignificant, but others have important implications. Should I sleep-in or get up early to accommodate 30-minutes of exercise before work? What task should I complete first? Should I make this decision alone or do I need to inform my supervisor? I often advise my children that good decision-making is critical to their success in life. So why is it some of the smartest people in the world sometimes make catastrophic decisions, which can cost careers and even lives?

In a recent article in the Australian Financial Review, Chad Slater described two corporate decisions with diabolical consequences.1 The first was the collapse of Long-Term Capital Management (LTCM) taking the world to the brink of a GFC-style collapse in 1998. The second example was the NASA space shuttle Challenger, which killed all seven crew members onboard the fatal flight on 28th January 1986. In both cases, the teams were led by some of the smartest people in the world. Perhaps, another more recent example of poor governance and decision-making is the royal commission into the banking sector. In each of these situations, what led these teams to make such disastrous decisions?

According to Slater, it was ‘stupidity’, or overlooking or dismissing conspicuously crucial information.2

Factors that increase stupidity2

According to Slater the following factors increase the risk of ‘stupid decision-making’:

  1. Social cohesion or group-think: where team harmony and agreement overrides individual thought or opinion
  2. Authoritarian decision-making: A strong individual dominating all decision-making
  3. Fixation on the outcome
  4. Information overload
  5. Rushing or urgency
  6. Stress
  7. Being outside your circle of competence
  8. Overconfidence

Overcoming bad decisions

Slater’s practical suggestions for overcoming poor decision-making include:

  1. Be wary of groups of experts offering strong opinions. Don’t be afraid to disagree with them
  2. Keep a diverse group of friends
  3. Be open-minded and develop a thirst for continual learning
  4. Have a plan in advance or a checklist
  5. Develop a keen sense of self-awareness
  6. Do not make decisions when you are tired, rushed or stressed.

 

References:

  1. Slater, C. ‘Stupid’ is not the opposite of ‘smart’: how to beat genius investors. https://www.afr.com/markets/equity-markets/stupid-is-not-the-opposite-of-smart-how-to-beat-genius-investors-20190428-p51hvw.
  2. Robinson, A. How not to be stupid. https://fs.blog/2019/01/how-not-to-be-stupid/