www.hbr.org

Why Good Leaders Make Bad Decisions

by Andrew Campbell, Jo Whitehead,

and Sydney Finkelstein

Neuroscience reveals what

distorts a leader’s judgment.

Here’s how you can keep your

own judgment clear.

Reprint R0902D

Why Good Leaders Make Bad Decisions

by Andrew Campbell, Jo Whitehead,

and Sydney Finkelstein

harvard business review • february 2009 page 1

CO

PYR

IGH

T ©

200

9 H

AR

VA

RD

BU

SIN

ESS

SC

HO

OL

PU

BLI

SHIN

G C

OR

PO

RA

TIO

N. A

LL R

IGH

TS

RE

SER

VE

D.

Neuroscience reveals what distorts a leader’s judgment. Here’s how you

can keep your own judgment clear.

Decision making lies at the heart of our per-sonal and professional lives. Every day wemake decisions. Some are small, domestic, andinnocuous. Others are more important, affect-ing people’s lives, livelihoods, and well-being.Inevitably, we make mistakes along the way.The daunting reality is that enormously im-portant decisions made by intelligent, respon-sible people with the best information and in-tentions are sometimes hopelessly flawed.

Consider Jürgen Schrempp, CEO of Daimler-Benz. He led the merger of Chrysler and Daim-ler against internal opposition. Nine yearslater, Daimler was forced to virtually giveChrysler away in a private equity deal. SteveRussell, chief executive of Boots, the UK drug-store chain, launched a health care strategy de-signed to differentiate the stores from competi-tors and grow through new health care servicessuch as dentistry. It turned out, though, thatBoots managers did not have the skills neededto succeed in health care services, and many ofthese markets offered little profit potential.The strategy contributed to Russell’s early de-

parture from the top job. Brigadier GeneralMatthew Broderick, chief of the Homeland Se-curity Operations Center, who was responsiblefor alerting President Bush and other seniorgovernment officials if Hurricane Katrinabreached the levees in New Orleans, wenthome on Monday, August 29, 2005, after re-porting that they seemed to be holding, de-spite multiple reports of breaches.

All these executives were highly qualified fortheir jobs, and yet they made decisions thatsoon seemed clearly wrong. Why? And moreimportant, how can we avoid making similarmistakes? This is the topic we’ve been explor-ing for the past four years, and the journey hastaken us deep into a field called decision neu-roscience. We began by assembling a databaseof 83 decisions that we felt were flawed at thetime they were made. From our analysis ofthese cases, we concluded that flawed decisionsstart with errors of judgment made by influen-tial individuals. Hence we needed to under-stand how these errors of judgment occur.

In the following pages, we will describe the

Why Good Leaders Make Bad Decisions

harvard business review • february 2009 page 2

conditions that promote errors of judgmentand explore ways organizations can build pro-tections into the decision-making process to re-duce the risk of mistakes. We’ll conclude byshowing how two leading companies appliedthe approach we describe. To put all this incontext, however, we first need to understandjust how the human brain forms its judgments.

How the Brain Trips Up

We depend primarily on two hardwired pro-cesses for decision making. Our brains assesswhat’s going on using pattern recognition, andwe react to that information—or ignore it—be-cause of emotional tags that are stored in ourmemories. Both of these processes are normallyreliable; they are part of our evolutionary ad-vantage. But in certain circumstances, both canlet us down.

Pattern recognition is a complex process thatintegrates information from as many as 30different parts of the brain. Faced with a newsituation, we make assumptions based onprior experiences and judgments. Thus achess master can assess a chess game andchoose a high-quality move in as little as sixseconds by drawing on patterns he or she hasseen before. But pattern recognition can alsomislead us. When we’re dealing with seem-ingly familiar situations, our brains can causeus to think we understand them when wedon’t.

What happened to Matthew Broderick dur-ing Hurricane Katrina is instructive. Broderickhad been involved in operations centers in Viet-nam and in other military engagements, andhe had led the Homeland Security OperationsCenter during previous hurricanes. These expe-riences had taught him that early reports sur-rounding a major event are often false: It’s bet-ter to wait for the “ground truth” from areliable source before acting. Unfortunately, hehad no experience with a hurricane hitting acity built below sea level.

By late on August 29, some 12 hours afterKatrina hit New Orleans, Broderick had re-ceived 17 reports of major flooding and leveebreaches. But he also had gotten conflictinginformation. The Army Corps of Engineershad reported that it had no evidence of leveebreaches, and a late afternoon CNN reportfrom Bourbon Street in the French Quarterhad shown city dwellers partying and claim-ing they had dodged the bullet. Broderick’s

pattern-recognition process told him thatthese contrary reports were the ground truthhe was looking for. So before going home forthe night, he issued a situation report statingthat the levees had not been breached, al-though he did add that further assessmentwould be needed the next day.

Emotional tagging is the process by whichemotional information attaches itself to thethoughts and experiences stored in our memo-ries. This emotional information tells uswhether to pay attention to something or not,and it tells us what sort of action we should becontemplating (immediate or postponed, fightor flight). When the parts of our brains control-ling emotions are damaged, we can see how im-portant emotional tagging is: Neurological re-search shows that we become slow andincompetent decision makers even though wecan retain the capacity for objective analysis.

Like pattern recognition, emotional tagginghelps us reach sensible decisions most of thetime. But it, too, can mislead us. Take the caseof Wang Laboratories, the top company in theword-processing industry in the early 1980s.Recognizing that his company’s future wasthreatened by the rise of the personal com-puter, founder An Wang built a machine tocompete in this sector. Unfortunately, he choseto create a proprietary operating system de-spite the fact that the IBM PC was clearly be-coming the dominant standard in the industry.This blunder, which contributed to Wang’s de-mise a few years later, was heavily influencedby An Wang’s dislike of IBM. He believed hehad been cheated by IBM over a new technol-ogy he had invented early in his career. Thesefeelings made him reject a software platformlinked to an IBM product even though the plat-form was provided by a third party, Microsoft.

Why doesn’t the brain pick up on such errorsand correct them? The most obvious reason isthat much of the mental work we do is uncon-scious. This makes it hard to check the data andlogic we use when we make a decision. Typi-cally, we spot bugs in our personal softwareonly when we see the results of our errors injudgment. Matthew Broderick found out thathis ground-truth rule of thumb was an inappro-priate response to Hurricane Katrina only afterit was too late. An Wang found out that hispreference for proprietary software was flawedonly after Wang’s personal computer failed inthe market.

Andrew Campbell

(andrew.campbell@ashridge.org.uk) and

Jo Whitehead

(jo.whitehead@ashridge.org.uk) are directors of Ashridge Strategic Man-agement Centre in London. Sydney Finkelstein (sydney.finkelstein@tuck.dartmouth.edu) is the Steven Roth Professor of Management at the Tuck School of Business at Dartmouth College in Hanover, New Hampshire, and the author of Why Smart Executives Fail. All three are coauthors of Think Again: Why Good Leaders Make Bad Decisions and How to Keep It from Happening to You (Harvard Business Press, 2009).

Why Good Leaders Make Bad Decisions

harvard business review • february 2009 page 3

Compounding the problem of high levels ofunconscious thinking is the lack of checks andbalances in our decision making. Our brains donot naturally follow the classical textbookmodel: Lay out the options, define the objec-tives, and assess each option against each objec-tive. Instead, we analyze the situation usingpattern recognition and arrive at a decision toact or not by using emotional tags. The two pro-cesses happen almost instantaneously. Indeed,as the research of psychologist Gary Kleinshows, our brains leap to conclusions and arereluctant to consider alternatives. Moreover,we are particularly bad at revisiting our initialassessment of a situation—our initial frame.

An exercise we frequently run at AshridgeBusiness School shows how hard it is to chal-lenge the initial frame. We give students a casethat presents a new technology as a good busi-ness opportunity. Often, a team works manyhours before it challenges this frame andstarts, correctly, to see the new technology as amajor threat to the company’s dominant mar-ket position. Even though the financial modelconsistently calculates negative returns fromlaunching the new technology, some teamsnever challenge their original frame and endup proposing aggressive investments.

Raising the Red Flag

In analyzing how it is that good leaders madebad judgments, we found they were affectedin all cases by three factors that either dis-torted their emotional tags or encouragedthem to see a false pattern. We call these fac-tors “red flag conditions.”

The first and most familiar red flag condi-tion, the presence of inappropriate self-interest,typically biases the emotional importance weplace on information, which in turn makes usreadier to perceive the patterns we want to see.Research has shown that even well-intentionedprofessionals, such as doctors and auditors, areunable to prevent self-interest from biasingtheir judgments of which medicine to pre-scribe or opinion to give during an audit.

The second, somewhat less familiar condi-tion is the presence of distorting attachments.We can become attached to people, places, andthings, and these bonds can affect the judg-ments we form about both the situation weface and the appropriate actions to take. Thereluctance executives often feel to sell a unitthey’ve worked in nicely captures the power of

inappropriate attachments.The final red flag condition is the presence of

misleading memories. These are memories thatseem relevant and comparable to the currentsituation but lead our thinking down thewrong path. They can cause us to overlook orundervalue some important differentiatingfactors, as Matthew Broderick did when hegave too little thought to the implications of ahurricane hitting a city below sea level. Thechance of being misled by memories is intensi-fied by any emotional tags we have attached tothe past experience. If our decisions in the pre-vious similar experience worked well, we’ll beall the more likely to overlook key differences.

That’s what happened to William Smith-burg, former chairman of Quaker Oats. He ac-quired Snapple because of his vivid memoriesof Gatorade, Quaker’s most successful deal.Snapple, like Gatorade, appeared to be a newdrinks company that could be improved withQuaker’s marketing and management skills.Unfortunately, the similarities between Snap-ple and Gatorade proved to be superficial,which meant that Quaker ended up destroyingrather than creating value. In fact, Snapple wasSmithburg’s worst deal.

Of course, part of what we are saying is com-mon knowledge: People have biases, and it’simportant to manage decisions so that thesebiases balance out. Many experienced leadersdo this already. But we’re arguing here that,given the way the brain works, we cannot relyon leaders to spot and safeguard against theirown errors in judgment. For important deci-sions, we need a deliberate, structured way toidentify likely sources of bias—those red flagconditions—and we need to strengthen thegroup decision-making process.

Consider the situation faced by Rita Chakra,head of the cosmetics business of ChoudryHoldings (the names of the companies and peo-ple cited in this and the following exampleshave been disguised). She was promoted headof the consumer products division and neededto decide whether to promote her number twointo her cosmetics job or recruit someone fromoutside. Can we anticipate any potential redflags in this decision? Yes, her emotional tagscould be unreliable because of a distorting at-tachment she may have to her colleague or aninappropriate self-interest she could have inkeeping her workload down while changingjobs. Of course we don’t know for certain

Idea in Brief

•

Leaders make decisions largely through unconscious processes that neuroscientists call pattern recognition and emotional tag-ging. These processes usually make for quick, effective decisions, but they can be distorted by self-interest, emotional attachments, or misleading memories.

•

Managers need to find systematic ways to recognize the sources of bias—what the authors call “red flag conditions”—and then design safeguards that introduce more analysis, greater debate, or stron-ger governance.

•

By using the approach described in this article, companies will avoid many flawed decisions that are caused by the way our brains operate.

Why Good Leaders Make Bad Decisions

harvard business review • february 2009 page 4

whether Rita feels this attachment or holds thatvested interest. And since the greater part ofdecision making is unconscious, Rita would notknow either. What we do know is that there is arisk. So how should Rita protect herself, or howshould her boss help her protect herself?

The simple answer is to involve someoneelse—someone who has no inappropriate at-tachments or self-interest. This could be Rita’sboss, the head of human resources, a head-hunter, or a trusted colleague. That personcould challenge her thinking, force her toreview her logic, encourage her to consider op-tions, and possibly even champion a solutionshe would find uncomfortable. Fortunately, inthis situation, Rita was already aware of somered flag conditions, and so she involved a head-hunter to help her evaluate her colleague andexternal candidates. In the end, Rita did ap-point her colleague but only after checking tosee if her judgment was biased.

We’ve found many leaders who intuitivelyunderstand that their thinking or their col-leagues’ thinking can be distorted. But few lead-ers do so in a structured way, and as a resultmany fail to provide sufficient safeguardsagainst bad decisions. Let’s look now at a coupleof companies that approached the problem ofdecision bias systematically by recognizing andreducing the risk posed by red flag conditions.

Safeguarding Against Your Biases

A European multinational we’ll call Global

Chemicals had an underperforming division.The management team in charge of the divi-sion had twice promised a turnaround andtwice failed to deliver. The CEO, Mark Thay-sen, was weighing his options.

This division was part of Thaysen’s growthstrategy. It had been assembled over the previ-ous five years through two large and foursmaller acquisitions. Thaysen had led the twolarger acquisitions and appointed the manag-ers who were struggling to perform. The chair-man of the supervisory board, Olaf Grunweld,decided to consider whether Thaysen’s judg-ment about the underperforming divisionmight be biased and, if so, how he might help.Grunweld was not second-guessing Thaysen’sthinking. He was merely alert to the possibilitythat the CEO’s views might be distorted.

Grunweld started by looking for red flagconditions. (For a description of a process foridentifying red flags, see the sidebar, “Identify-ing Red Flags.”) Thaysen built the underper-forming division, and his attachment to itmight have made him reluctant to abandonthe strategy or the team he had put in place.What’s more, because in the past he had suc-cessfully supported the local managers duringa tough turnaround in another division, Thay-sen ran the risk of seeing the wrong patternand unconsciously favoring the view that con-tinued support was needed in this situation,too. Thus alerted to Thaysen’s possible distort-ing attachments and potential misleading

Idea in Practice

Leaders make quick decisions by recognizing patterns in the situations they encounter, bol-stered by emotional associations attached to those patterns. Most of the time, the process works well, but it can result in serious mis-takes when judgments are biased.

Example:

When Wang Laboratories launched its own personal computer, founder An Wang chose to create a proprietary operat-ing system even though the IBM PC was clearly becoming the standard. This blunder was influenced by his belief that IBM had cheated him early in his career, which made him reluctant to consider using a system linked to an IBM product.

To guard against distorted decision making and strengthen the decision process, get the help of an independent person to identify which decision makers are likely to be affected by self-interest, emotional attachments, or misleading memories.

Example:

The about-to-be-promoted head of the cosmetics business at one Indian com-pany was considering whether to appoint her number two as her successor. She recognized that her judgment might be distorted by her attachment to her colleague and by her vested interest in keeping her workload down during her transition. The executive asked a head-hunter to evaluate her colleague and to deter-mine whether better candidates could be found externally.

If the risk of distorted decision making is high, companies need to build safeguards into the decision process: Expose decision makers to additional experience and analysis, design in more debate and opportunities for chal-lenge, and add more oversight.

Example:

In helping the CEO make an im-portant strategic decision, the chairman of one global chemical company encouraged the chief executive to seek advice from investment bankers, set up a project team to analyze op-tions, and create a steering committee that in-cluded the chairman and the CFO to generate the decision.

Why Good Leaders Make Bad Decisions

harvard business review • february 2009 page 5

memories, Grunweld considered three types ofsafeguards to strengthen the decision process:

Injecting fresh experience or analysis.

Youcan often counteract biases by exposing the de-cision maker to new information and a differ-ent take on the problem. In this instance,Grunweld asked an investment bank to tellThaysen what value the company might getfrom selling the underperforming division.Grunweld felt this would encourage Thaysento at least consider that radical option—a stepThaysen might too quickly dismiss if he hadbecome overly attached to the unit or its man-agement team.

Introducing further debate and challenge.This safeguard can ensure that biases are con-fronted explicitly. It works best when thepower structure of the group debating theissue is balanced. While Thaysen’s chief finan-cial officer was a strong individual, Grunweldfelt that the other members of the executive

group would be likely to follow Thaysen’s leadwithout challenging him. Moreover, the headof the underperforming division was a mem-ber of the executive group, making it hard foropen debate to occur. So Grunweld proposed asteering committee consisting of himself, Thay-sen, and the CFO. Even if Thaysen stronglypushed for a particular solution, Grunweldand the CFO would make sure his reasoningwas properly challenged and debated. Grun-weld also suggested that Thaysen set up asmall project team, led by the head of strategy,to analyze all the options and present them tothe steering committee.

Imposing stronger governance. The re-quirement that a decision be ratified at ahigher level provides a final safeguard. Stron-ger governance does not eliminate distortedthinking, but it can prevent distortions fromleading to a bad outcome. At Global Chemi-cals, the governance layer was the supervisoryboard. Grunweld realized, however, that its ob-jectivity could be compromised because he wasa member of both the board and the steeringcommittee. So he asked two of his board col-leagues to be ready to argue against the pro-posal emanating from the steering committeeif they felt uncomfortable.

In the end, the steering committee proposedan outright sale of the division, a decision theboard approved. The price received was wellabove expectations, convincing all that theyhad chosen the best option.

The chairman of Global Chemicals took thelead role in designing the decision process.That was appropriate given the importance ofthe decision. But many decisions are made atthe operating level, where direct CEO involve-ment is neither feasible nor desirable. That wasthe case at Southern Electricity, a division of alarger U.S. utility. Southern consisted of threeoperating units and two powerful functions.Recent regulatory changes meant that pricescould not be raised and might even fall. Somanagers were looking for ways to cut back oncapital expenditures.

Division head Jack Williams recognized thatthe managers were also risk averse, preferringto replace equipment early with the best up-grades available. This, he realized, was a resultof some high-profile breakdowns in the past,which had exposed individuals both to com-plaints from customers and to criticism fromcolleagues. Williams believed the emotional

Identifying Red Flags

Red flags are useful only if they can be spotted before a decision is made. How can you recognize them in complex situations? We have developed the following seven-step process:

1: Lay out the range of options.

It’s never possible to list them all. But it’s normally helpful to note the ex-tremes. These provide boundaries for the decision.

2: List the main decision makers.

Who is going to be influential in making the judgment calls and the final choice? There may be only one or two people involved. But there could also be 10 or more.

3: Choose one decision maker to

focus on.

It’s usually best to start with the most influential person. Then identify red flag conditions that might distort that individual’s thinking.

4: Check for inappropriate self-

interest or distorting attachments.

Is any option likely to be particularly attractive or unattractive to the decision maker because of personal interests or attachments to people, places, or things? Do any of these interests or attachments conflict with the objectives of the main stakeholders?

5: Check for misleading memories.

What are the uncertainties in this deci-sion? For each area of uncertainty, con-sider whether the decision maker might draw on potentially misleading memo-ries. Think about past experiences that could mislead, especially ones with strong emotional associations. Think also about previous judgments that could now be unsound, given the cur-rent situation.

6: Repeat the analysis with the next

most influential person.

In a complex case, it may be necessary to consider many more people, and the process may bring to light a long list of possible red flags.

7: Review the list of red flags you

have identified

and determine whether the brain’s normally efficient pattern-recognition and emotional-tagging pro-cesses might be biased in favor of or against some options. If so, put one or more safeguards in place.

Why Good Leaders Make Bad Decisions

harvard business review • february 2009 page 6

tags associated with these experiences mightbe distorting their judgment.

What could he do to counteract these ef-fects? Williams rejected the idea of strongergovernance; he felt that neither his manage-ment team nor the parent company’s execu-tives knew enough to do the job credibly. Healso rejected additional analysis, becauseSouthern’s analysis was already rigorous. Heconcluded that he had to find a way to injectmore debate into the decision process and en-able people who understood the details tochallenge the thinking.

His first thought was to involve himself andhis head of finance in the debates, but hedidn’t have time to consider the merits of hun-dreds of projects, and he didn’t understand thedetails well enough to effectively challenge de-cisions earlier in the process than he currentlywas doing, at the final approval stage. Williamsfinally decided to get the unit and functionheads to challenge one another, facilitated by aconsultant. Rather than impose this process onhis managers, Williams chose to share histhinking with them. Using the language of redflags, he was able to get them to see the prob-

lem without their feeling threatened. The newapproach was very successful. The reducedcapital-expenditure target was met with roomto spare and without Williams having to makeany of the tough judgment calls himself.

• • •

Because we now understand more about howthe brain works, we can anticipate the circum-stances in which errors of judgment may occurand guard against them. So rather than rely onthe wisdom of experienced chairmen, the hu-mility of CEOs, or the standard organizationalchecks and balances, we urge all involved inimportant decisions to explicitly considerwhether red flags exist and, if they do, to lobbyfor appropriate safeguards. Decisions that in-volve no red flags need many fewer checks andbalances and thus less bureaucracy. Some ofthose resources could then be devoted to pro-tecting the decisions most at risk with more in-trusive and robust protections.

Reprint R0902D

To order, see the next pageor call 800-988-0886 or 617-783-7500or go to www.hbr.org

The reality is that

important decisions

made by intelligent,

responsible people with

the best information and

intentions are sometimes

hopelessly flawed.

Further Reading

To Order

For

Harvard Business Review

reprints and subscriptions, call 800-988-0886 or 617-783-7500. Go to www.hbr.org

For customized and quantity orders of Harvard Business Review article reprints, call 617-783-7626, or e-mailcustomizations@hbsp.harvard.edu

page 7

The

Harvard Business Review

Paperback Series

Here are the landmark ideas—both contemporary and classic—that have established Harvard Business Review as required reading for businesspeople around the globe. Each paperback includes eight of the leading articles on a particular business topic. The series includes over thirty titles, including the following best-sellers:

Harvard Business Review on Brand Management

Product no. 1445

Harvard Business Review on Change

Product no. 8842

Harvard Business Review on Leadership

Product no. 8834

Harvard Business Review on Managing People

Product no. 9075

Harvard Business Review on Measuring Corporate Performance

Product no. 8826

For a complete list of the

Harvard Business Review paperback series, go to www.hbr.org.