Why Do Smart Managers Make Bad Decisions?

 What do racial injustice, pandemics, financial crises, globalisation, poverty, stock market, climate change, traffic, movement of billiard balls, swarming of birds, and your diet have in common?     Complexity.

 Complexity lies beneath all natural, physical and human systems – as in ecology, biology, business, and economy. According to Peter Senge, complexity occurs where cause and effect are not close in time and space – like the lag time between a seed and a grown tree, injustice and revolt, eating and gaining weight. Unlike ‘complicated’, complexity is unpredictable (a car is complicated, traffic is complex) – as complexity arises from dynamic interactions of numerous variables encompassing, social, political, cultural, historical, and psychological domains. Biologist Lewis Thomas, observed “You cannot meddle with one part of a complex system from the outside without the almost certain risk of setting off disastrous events in other, remote parts. If you want to fix something you are first obliged to understand the whole system.”[1]

That explains why so many well-intentioned personal decisions, government policies and business strategies backfire and produce counter-intuitive and unintended consequences. History and management books are fraught with such examples:  use of cheaper drugs pushes costs up, not down; building roads to reduce congestion increase traffic, delays, and pollution; antibiotics have accelerated the evolution of drug resistant bacteria and viruses; pesticides and herbicides have increased the spread of pests and weeds, and have killed off their natural predators.

 In the policy domain, the US “Passenger Bill of Right” – intended to prevent passenger delays on the tarmac – has given the airlines reason to proactively cancel flights rather than pay penalties for flight delays. As a result, rather than simply being delayed, passengers, end up stranded, often not able to book another flight until the following day. This legislation was lobbied for based on a handful of overpublicized and exaggerated stories. In the 1920’s US, the prohibition led to the formation of organised crime. Only a few months ago, China, just two weeks after the detection of corona virus in Wuhan, allowed millions of residents to leave the city – unleashing a worldwide pandemic!

Business and corporate report card is no better. A major study by Shell Oil of Fortune 500 companies revealed “most corporations are dramatic failures; [they] develop and exploit only a fraction of their potential and die prematurely at an average age fewer than 40 years… There is accumulating evidence that corporations fail because the prevailing thinking and language of management are too narrowly based on the prevailing thinking and language of economics”.[2]

I can think of two key (there are more) reasons for why smart leaders make bad decisions.  First, is the lack of understanding and appreciation of complexity (the whole system) – they simply don’t have the right tools. This is not surprising, as the great majority of today’s leaders have been trained in schools where the dominant mode of education is linear and reductionist (i.e., divide and conquer) – with the concomitant illusion of power, predictability, and control. John Sterman, Director of Systems Thinking at MIT, sums this up: “Thoughtful leaders increasingly suspect that the tools they have been using have not only failed to solve the persistent problems they face, but may in fact be causing them.”[3]

My second reason is the commonplace practice of executive pay-for-performance.  This misguided incentive assumes a causal connection between executive pay and performance. Nonetheless, systemic and enduring performance of a complex system (corporation) cannot be linked to symptomatic and, often, self-motivated fixes by its leaders. In contrast, this encourages short-term decisions and behaviours – notably, a steadfast focus on stock prices – at the expense of the long-term organisational and societal welfare.

 

 

 

 

 

 

 

 

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[1] Lewis Thomas, The Medusa and the Snail: More Notes of a Biology Watcher (New York, NY: Viking Press, 1979), p. 90.

[2] Arie de Geus, The Living Company, Harvard Business School Press, Boston, Mass 1997

[3]  Sterman, J. (2001), “System Dynamics Modeling: Tools for Learning in a Complex World”, California Management Review, Vol. 43, No. 4.