Applying lessons learned from cognitive psychology to increase organizational value

Value Before Delivery

Jimmy Chou

• Dominion Digital

• Operations & Technology Strategy

Email: jchou@dominiondigital.com Twitter: @choujimmy

• CFA Charterholder

• Biased Decision Maker

Email: jchou@dominiondigital.com Twitter: @choujimmy

The next, and bigger, step in value

delivery begins with improving the

way we make strategic decisions at

the organizational level

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As we improve the way we deliver on projects, we continue to get better at ensuring that we

work on the right features and capabilities. Yet, our value delivered to the organization is still

capped by the types of projects we work on.

Mission & Vision

Strategy

Goal Goal Goal

Objective

Requirements

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Performance Indicators

Capabilities

Goal

Typical value delivery at the project level

Decisions to define organizational value

Are we working on the right projects?

A Constant

Among the Change BA

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The global credit and financial crisis starting in 2007 is one of the worst ever. There are signs

that we are on the road to economic recovery. Along with the recovery are many initiatives to

reform our financial system.

Are financial reforms the only answer?

Delving deeper into the root causes of the major financial crises throughout our history, we see

a consistent theme–our biases. “A Satire of Tulip Mania” recounts the tulip mania that swept

Holland in the 1630s. Single tulip bulbs sold for 10x the annual income of a skilled craftsman.

“We have met the enemy and he is us.” - Pogo

We are biased decision makers.

Daniel Kahneman Amos Tversky

Not all cognitive biases are bad.

Cognitive research has demonstrated that there are at least two systems of reasoning or decision

making: 1) the intuitive and 2) the rational. It is the intuitive system that serves as the basis for

our cognitive biases.

Intuitive • Effortless

• Automatic

• Rapid

• Opaque

Rational • Effortful

• Conscious

• Slow

• Logical

Malcolm Gladwell calls the intuitive system “rapid cognition” or “thin slicing.” In Blink, an

expert recognizes a statue as a fake at first glance, or within a “blink,” after an initial group of

experts exhaustively studied and analyzed the statue and confirmed its authenticity.

Am I real?

Rapid fire decisions are the basis for cycles of corruption.

Top Three Biases

In Corporate Decision Making OU

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Overconfidence bias is our tendency to overestimate our abilities and knowledge…

…which leads to an underestimation of odds and uncertainty in complex decisions.

With high expectations to be the most advanced baggage handling system in the world, the

system at Denver Int’l was finished 16 months late, riddled with problems. After almost a decade

of struggling to fix the problems, the project was abandoned…Billions of dollars over budget.

“It was hubris” - Richard de Neufville

Source: “Denver Airports Saw the Future. It Didn’t Work” Kirk Johnson, NYT

Confirmation bias is our tendency to seek and interpret information that confirms our preconceptions...

…while underweighting and/or discarding contradictory information.

Driven by the need to lower costs and meet increased demand, Schlitz started a cheaper brewing

process in the 1970’s and cited research that consumers couldn’t tell beers apart. Although

customers voted through lower sales, Schlitz continued with the flawed strategy and went into a

severe decline.

Need to change +

Strong beliefs +

Confirmation bias =

Disaster

Availability bias is our tendency to judge an event as likely or frequent if it is easy to imagine or recall…

…thus, narrowing our vision and discounting events outside of our immediate memory

Immediately after the September 11 terrorist attacks, travellers made the decision that travelling

to their destination by car was a far safer way to travel than by air. The reality was that air travel

had never been safer with all the increased security. Our viewpoint was certainly narrowed.

Photo by -wink- on Flickr

Unsound business practices were taken to the extreme chasing the short sighted “success” of

competition…leading to incorrect incentives…leading to unsustainable irrational

behavior…leading to the current financial crisis.

“A Closer Look at the Global Financial Crisis” GOOD Magazine Liam Johnstone

Four Steps to

More Robust Decisions

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1. Identify “at risk” decisions and processes.

Rare, one of a kind strategic decisions–major M&A, crucial technology choices, and “bet the

company” investments. These decisions are characterized as extremely uncertain and highly

complex. Both characteristics increase the opportunity for our biases to lead us astray.

Repetitive, but high stakes decisions that shape a company’s strategy over time–R&D allocations

in a pharmaceutical company, capital expenditure decisions, and new product launches. The

frequency and complexity of these investment decisions make them prime candidates for greater

rigor in protecting against our biases.

2. Consider the improbable through an explicit exploration of major uncertainties…

As large decisions increase in complexity and variability, performing sensitivity analysis can be

useful. Sensitivity analysis provides a means to understand a decision’s drivers and the sensitivity

of results to changes in these drivers.

Objective: Increase premiums sold

5% 10% 15% 20% 25% 30% 35% 40%

1% 122,289$ 244,578$ 366,867$ 489,156$ 611,445$ 733,734$ 856,023$ 978,312$

2% 244,578$ 489,156$ 733,734$ 978,312$ 1,222,890$ 1,467,468$ 1,712,046$ 1,956,624$

3% 366,867$ 733,734$ 1,100,601$ 1,467,468$ 1,834,335$ 2,201,202$ 2,568,069$ 2,934,936$

4% 489,156$ 978,312$ 1,467,468$ 1,956,624$ 2,445,780$ 2,934,936$ 3,424,092$ 3,913,248$ 5% 611,445$ 1,222,890$ 1,834,335$ 2,445,780$ 3,057,225$ 3,668,670$ 4,280,115$ 4,891,560$

6% 733,734$ 1,467,468$ 2,201,202$ 2,934,936$ 3,668,670$ 4,402,404$ 5,136,138$ 5,869,872$

7% 856,023$ 1,712,046$ 2,568,069$ 3,424,092$ 4,280,115$ 5,136,138$ 5,992,161$ 6,848,184$

8% 978,312$ 1,956,624$ 2,934,936$ 3,913,248$ 4,891,560$ 5,869,872$ 6,848,184$ 7,826,496$

9% 1,100,601$ 2,201,202$ 3,301,803$ 4,402,404$ 5,503,005$ 6,603,606$ 7,704,207$ 8,804,808$

10% 1,222,890$ 2,445,780$ 3,668,670$ 4,891,560$ 6,114,450$ 7,337,340$ 8,560,230$ 9,783,120$

11% 1,345,179$ 2,690,358$ 4,035,537$ 5,380,716$ 6,725,895$ 8,071,074$ 9,416,253$ 10,761,432$

12% 1,467,468$ 2,934,936$ 4,402,404$ 5,869,872$ 7,337,340$ 8,804,808$ 10,272,276$ 11,739,744$

13% 1,589,757$ 3,179,514$ 4,769,271$ 6,359,028$ 7,948,785$ 9,538,542$ 11,128,299$ 12,718,056$

14% 1,712,046$ 3,424,092$ 5,136,138$ 6,848,184$ 8,560,230$ 10,272,276$ 11,984,322$ 13,696,368$

15% 1,834,335$ 3,668,670$ 5,503,005$ 7,337,340$ 9,171,675$ 11,006,010$ 12,840,345$ 14,674,680$

Underwriting Effectiveness (% of efficiency gains applied to increased premiums)

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1 Identify specific performance drivers/variables

1

2 Assess impact of changing each major driver on desired objective

2

Assumptions: Total underwriting hours per year = 64,144 Average premium per hour = $3,813

Example for illustrative purposes only

-6 -5 -3 -1 0 2 4 5 7 9 10 12 14 15 17 19 20 22 23 25 27

Another tool that takes the analysis of uncertainty even further is Monte Carlo Simulation (MCS). MCS is a method for iteratively evaluating different probabilities and scenarios through

a computer generated simulation.

Likely Case = $7M

Best Case = $27M

There’s a 10%

probability of a loss

Embrace uncertainty

Example for illustrative purposes only

3. Consider the unpopular and broader view to avoid confirmation and availability bias…

“Large groups of people are smarter

than an elite few, no matter how

brilliant. These groups are better

at solving problems, fostering

innovation, coming to wise decisions,

even predicting the future.”

- James Surowieki, The Wisdom of Crowds

Prediction markets are competitive exchanges or markets. Prediction markets are a great way to

engage employees and involve them in the creation of projections and ideas, and ultimately

increasingly socialize and distribute decision inputs within the organization.

Identify potential

problems early

Engage employees in the

business’ success

Provide insights into

business processes

4. Build quality in a structured decision making process…

A pre-mortem is the hypothetical opposite of a post-mortem. The pre-mortem explores why a

project might fail before it starts. It is a simple idea with significant benefits by not only

encouraging, but legitimizing dissent.

“We’re looking in a crystal

ball, and this project has

failed. What are all the

reasons why you think the

project failed?”

Before a project starts, ask this question…

Stage gating is a way to ensure consistent monitoring of projects. Rather than committing to full

funding of a project at the beginning of a large investment decision, key milestones are laid out

at intervals throughout the project with go-no go decisions built in.

Project

Completed

Stage Gate

3

Stage Gate

2

Stage Gate

1

Cost Benefit

Analysis

(CBA)

Review

Project

funding and

resources

requested GO GO GO GO

STOP STOP STOP STOP

Iterative value delivery

and confirmation

Inserting a devil’s advocate into the process is another mechanism for capturing dissension. A

“challenge team” whose sole role is to act as a contrarian viewpoint throughout the lifecycle of a

decision and project creates a healthy tension in large, complex decisions.

Value Before Delivery

Darrell Estabrook

John Hilowitz

Hope Norman

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