Practical analysis for investment professionals
22 February 2016

Decision Making under Pressure

Decision Making under Pressure

Should we make decisions based on intuition and emotion? Or should we make them more rationally, using data, analytics, and numbers?

According to Erika James, the John H. Harland Dean of Emory University’s Goizueta Business School, the best process for making decisions under pressure is to use the data and numbers to inform our intuition. Leaders must recognize and avoid falling prey to mind tricks and biases. Power dynamics can also lead to poor decisions, and leaders do best to pursue an approach that is inquiry-based rather than advocacy-based.

In this question and answer session that followed her formal presentation at the 60th Annual Financial Analysts Seminar (FAS) in Chicago last summer, James relates her thinking to the needs of professional investors.

A full version of her presentation is also available in the CFA Institute Conference Proceedings Quarterly.

Audience member: What should we be doing differently next Monday morning to help us become better investors?

Erika James: One takeaway would be to take a pause before you make a decision and think about the different kinds of biases that might be influencing you. That step alone can set you on a better course for your decision making. Another would be to recognize that the decision is not only about you.

Clearly, we have egos and want to prove our value and worth by what we do, but ultimately we are in the business of serving our clients. The more we are mindful of what is in the best interests of the client, the better. I would also recommend bringing others into the decision-making process.

When talking about biases and emotions, how much of that is brain chemistry that we cannot control versus something that we can improve by taking a step back?

A lot of it is your own brain chemistry, but you can control it if you recognize that your brain operates in that way. The challenge is taking the time to stop and reflect on our decisions and recognize that our brains have a tendency to work ahead of us.

When you are balancing data against intuition, how do you know where to find the right data?

We can never know for sure that the data and numbers we have access to are exactly what we should be considering. The question is, What data are good enough? Use your own history of decision making to recognize when you have what you need, not what you want, in terms of information. The best leaders, even at their most confident, usually have in place a Plan B if and when Plan A does not work out.

In our 24/7, media-driven, noisy world, do companies have a greater tendency to try to hide crises?

Yes. When a company is faced with a threat or potential crisis, the most dangerous thing is denial: We did not do it. It was not us. It is not our fault. Inevitably, something will be revealed that suggests engagement and/or culpability for the organization or its leaders — not necessarily in an intentionally malicious way, but something that suggests that the organization contributed to the problem somehow.

If 60% of crises are smoldering, how can financial analysts better identify these problems before they happen?

Go back and ask your organization, What are our most likely vulnerabilities? Do your own internal audit and start to manage some of those vulnerabilities before a problem arises.

What were the worst examples of crisis management during the 2008 financial crisis?

I think it was largely the same thing that we see with almost any type of crisis, which is the tendency to either underestimate the severity of the crisis or immediately move to self-preservation. Such behavior sends us down a path that can be hard to recover from and that leads to a very narrow set of options. Being receptive to the new reality and how to take advantage of it opens us up to many more opportunities and alternatives than the path of denial.

How do I prevent client biases from affecting my investment recommendations?

Have conversations with your clients about their biases as well as your own. Use an inquiry approach rather than an advocacy one. We sometimes find ourselves wanting to advocate for a particular position or recommendation to a client, and if we can reframe those conversations so that they are more inquiry-based, then we get feedback and input from our clients while the clients are getting information and feedback from us.

How does making decisions by myself differ from making them in a group?

There is real danger in making decisions by yourself because you do not have access to information that would either confirm or invalidate your thought process. The challenge of making group decisions, though, is that it can take more time. Once you have other people’s input, you have to have conversations and reach consensus. But by and large, we tend to reach better-quality decisions with group decision making.

Which of these biases has the most detrimental impact on crisis decisions: overconfidence, priming, the endowment effect, excessive focus, groupthink, or deferral to experts?

I do not know which one is most powerful, but deferral to experts is an important one that I did not discuss. We sometimes have a tendency to believe that because someone is the expert, she knows all. We can end up abdicating responsibility for our decision making to the experts. But although the expert has in-depth knowledge around a particular topic, we as the leaders have access to the big picture about the organization. In other words, leaders, not functional experts, know the broader context within which decisions must be made, and when we abdicate to someone who has expert but narrow knowledge, we often end up making a decision that is not the best.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Mark Harrison, CFA

Mark Harrison, CFA, was director of journal publications at CFA Institute, where he supported a suite of member publications, including the Financial Analysts Journal, In Practice summaries, and CFA Digest. He has more than 12 years of investment experience as a portfolio manager and securities analyst. Harrison is a graduate of the University of Oxford.

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