6. Groupthink: A much-used term that needs clarification: there are a number of conditions for groupthink to occur. One needs a cohesive and homogeneous in-group with a hierarchy among members (which prohibits individual thinking and dissenting opinions) and which is under pressure from a deadline or recent failures and cut off from outside influences. Groupthink will result in flawed decision making, especially because it often occurs in teams where the company’s strategy is being designed. Early warnings will be rationalized away and the own strengths will typically be overestimated. A plan B doesn’t seems necessary any more and anyone that brings in alternative thinking or wants to examine the risks is regarded as disloyal. How does one prevent groupthink? A team should be freed up from the influence of eachother, both colleagues and superiors. At least one member should be appointed as devil’s advocate. Individual thinking, constructive critique and team diversity will be key.
7. Bandwagon effect: A high proportion of people doing something increases the likelihood of any other individual to follow. Commonly known as the “Herd Instinct” that is present in all of us. The effect is responsible for the majority of stock bubbles and numerous other events in society. It is not unlikely most companies that migrate their IT systems to a modern ERP system do that because the rest does it as well.
8. Interloper effect (consultancy): The irrational belief that external third parties would have better insight than internal employees. Proposals and findings from consultants are accepted more quickly, are attributed greater authority and undergo less scrutiny than what would be justified. The danger is the manager is devolving responsibility of the actions taken on these proposals to those same third parties. Consultants are the biggest example of this.
9. Sunk cost effect: When a decision needs to be made, historical costs that were made on the project are irrelevant. People often have the tendency towards some kind of misplaced consistency. It is not because a lot of money has been spent, that this should influence future decisions. Take the example of a plant being built, 20 Million USD has been spent and it will take another 10 million to finish it. Instead, an entirely new one can be built for 9 million. All things equal, a decision maker should go for the latter option. Otherwise you are ‘throwing good money after bad money’. In economy, there is rarely a ‘point of no return’ where one has to go on a chosen route. New opportunities can change the decision paradigm, a manager is not wasting money by rerouting future investments away from ongoing project that appear to be commercially unviable.
10. Framing effect: The same option presented differently will alter people’s perceptions, change preferences and thus decisions. Any individual receiving certain information will subconsciously filter information and emphasize certain pieces. This happens all the time, but in a different way depending on how that same information is presented. Example: Will you prefer a scenario in which 200 people will be saved or one in which there is a 33% chance 600 people will be saved, and 66% that no one will be saved? You will most likely go for the first scenario. What if you chose between a certainty 400 people died or a 33% chance that nobody dies and a 66% chance all 600 will die? Now, you will most likely chose the latter scenario. Your preferences switched, just due to the way this was presented.