019: Understand Behavioral Economics to Improve How You Lead
Hello from Bengaluru!
✋In case we haven’t met - my name is Narayan Kamath. I am an Executive and Leadership Coach, helping Engineering/Technology leaders multiply their impact, enjoy greater career success and feel more fulfilled
Earlier this week, I took a day trip to Mangaluru, one of favourite places - a city I've lived and worked in, and is also part of my roots.
I left home at 4:45 am, planning to catch the 7:15 am flight that would get me to Mangalore by 8:15 am. The flight which was supposed to take off at 7:15 am, left the parking bay at 8:00 am, and took off finally at 9:00 am.
The reason?
Fog!
While there are two runways at the Kempegowda International Airport, only one is CAT IIIB compliant - i.e. allows flights to land in low visibility conditions. To make things worse, not all pilots are CAT IIIB trained.
This results in massive runway congestion and flight delays and cancellations.
This situation is likely to persist until mid-February.
Fortunately, this impacts only the early morning flights, so if you're flying out of Bengaluru in the near future, steer clear of early morning flights.
Trying something different this week.
This is an article jointly written with John Howe, where we explore the intersection of our areas of expertise: #leadership (Narayan) and #behavioraleconomics (John).
Let’s start with a brief description of behavioral economics.
Behavioral eco - a brief primer
Standard economic models assume people are perfectly rational, e.g., they collect and analyze data correctly.
Psychology has shown, perhaps not surprisingly, that this is not always the case.
Behavioral economics is the fusion of economics and psychology. It examines how behavioral biases and cognitive limitations affect our decisions, and what we can do to mitigate the effects of biases and cognitive limitations.
One quick way to get a sense of behavioral economics is to read the archive of John’s (free!) newsletter.
The newsletter tends to be short, readable, and occasionally amusing. Did we say that it is free?
From the scores, perhaps hundreds, of biases that have been documented, we focus here on two: confirmation bias and overconfidence.
Confirmation bias
Confirmation bias is our tendency to be open to information that confirms beliefs that we already have, while being closed to information that does not support those beliefs.
This bias is not at all unexpected: after all, it can be comforting to have our worldview reinforced and uncomfortable to have it challenged.
Alternatively, we can think of confirmation bias as our being receptive to information that points to a goal we want, and cool to information that suggests the goal is not achievable or desirable.
Note that confirmation bias is often unconscious but can be deliberate as well: Think of a leader who surrounds himself with so-called “Yes men.”
Examples of confirmation bias in leadership:
Once you’ve taken a decision, you notice only data that supports your decision and fail to notice anything that shows it in bad light.
Perhaps you are not open to bad news about progress on a project or bad news about sales.
I (Narayan) once hired a consultant on my team based on their cv and based on what I considered a good interview. Later, I asked for feedback from other team members and stakeholders and thought everything was good. But things were not good, and I had to let him go in a few months. When I asked my team why they did not alert me earlier - they said they had, but I was in no mood to listen to anything critical about my “star” hire. I found this difficult to believe and went back to check emails from my team members and stakeholders - and realised that the warning signs were there all the time, I just failed to notice them because they went against my own judgment (and my decision to hire him).
How to mitigate confirmation bias?
Awareness is always the first step and, having read this far, you’ve taken the first step.
Then: In your inner circle,strive to have people who will tell you their honest opinion.
Ask “What could go wrong?” if you lean to “glass half full” and “What could go right?” if you are a congenital pessimist.
Your inner circle will include members of your work team but might also include outside mentors (such as Narayan—blatant plug 😉).
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Overconfidence
Leaders obviously need to be confident, and the line between confidence and overconfidence is not always a clear one. But clearly, overconfidence can lead to bad, sometimes disastrous, outcomes.
For example, an overconfident leader might continue to invest in a failing project, one with little chance of success. This is also an example of the sunk cost fallacy, perhaps the topic of a future post. We recommend Annie Duke’s book QUIT for rules about optimal quitting.
A little knowledge is a dangerous thing. I (Narayan) experienced this first-hand when in my first few months as a delivery lead in an engineering group, my team’s deliveries were often flagged for being delayed/going long over schedule. When I took this up with my manager, he noticed that I had built almost no contingency or buffer in any of my delivery promises. While I did work up the schedule “scientifically”, something I was proud I had picked up very quickly, I had neglected to add a “fudge factor” that a more experienced manager would have added. I was popular with Project Managers for not adding too much fat - but all that backfired when the deliveries started slipping!
And while it is not possible to get into the mind of Sam Bankman-Fried (aka SBF), overconfidence was almost certainly a contributing factor to the FTX debacle.
How to mitigate overconfidence?
As with confirmation bias, it is good to have people, perhaps outside advisors, who are willing to tell you the truth as they see it.
Similarly, a leader can ask, “What can go wrong?”
When John was on the boards of directors of two startups, his favorite question to the CEO/founder was, “What keeps you awake at night?” His experience suggests that honest reflection on that question can reduce CEO overconfidence (and that an unwillingness to do so was a big red flag).
Summing up
We humans have many cognitive limitations and biases, and they influence leadership frequently.
We believe that the examination of the intersection of leadership and behavioral economics is a fruitful one.
If you agree, if you have found this post interesting, let us know—with sufficient interest, we will do more in the future.
And please do send me your comments questions, insights, suggestions - by commenting below.
I read and respond to every comment personally.
That's all this week! Thanks for your time.
👋
Narayan
PS: When you are ready, here are some ways we can work together to amplify your impact:
1. Grab a free copy of my Deliver Through Others Checklist - It’s a useful summary of the key principles to working better with and through others— Click Here
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