Report Summary: A Structured Approach to Strategic Decisions by Daniel Kahneman, Dan Lovallo and Olivier Sibony

Discipline and structure have improved the process of hiring at Google, Amazon, and McKinsey. Now Nobel Prize-winning cognitive scientist Daniel Kahneman – the originator of the structured interviewing process these companies used – believes a similar method could enhance strategic decision making, too. Kahneman and his co-authors, business strategy experts Dan Lovallo and Olivier Sibony, make a convincing case for structured, strategic decision making in a cogent article for MIT Sloan Management Review.

Summary of A Structured Approach to Strategic Decisions by Daniel Kahneman, Dan Lovallo and Olivier Sibony
Summary of A Structured Approach to Strategic Decisions by Daniel Kahneman, Dan Lovallo and Olivier Sibony

Content Summary

Take-Aways
Summary
About the Authors

Take-Aways

  • The Mediating Assessments Protocol (MAP) approach to structured decision making draws from extensive research into hiring decisions.
  • Unstructured decision making suffers from defects associated with mental models.
  • MAP structures decision making to improve results with little additional effort.
  • The MAP approach relegates holistic evaluation to the last of three steps.

Summary

The Mediating Assessments Protocol (MAP) approach to structured decision making draws from extensive research into hiring decisions.

A large body of research into hiring decision making has described how cognitive weaknesses – biases, the halo effect and more – affect the quality of evaluative judgments. The same pitfalls that affect the quality of hiring decisions apply for strategic decisions.

“Whatever else it produces, any organization is a decision factory.”

The Mediating Assessments Protocol (MAP) approach remedies these weaknesses by incorporating lessons from Daniel Kahneman’s work on structured interviewing in the 1950s. Kahneman’s most important finding then was that better hiring decisions result when global evaluations occur only at the end of a structured process. Structuring evaluations that way can benefit strategic decisions as well.

Unstructured decision making suffers from defects associated with mental models.

Kahneman’s research showed that, in hiring, unstructured interviews yielded evaluations that didn’t accurately reflect candidates’ likelihood of success. The interviewer’s mental model of the candidate – commonly called an impression – interfered with accurate evaluations.

“When differentiated, independent facts are clearly laid out, logical errors are less likely.”

A mental model imposes false coherence on the candidate’s qualities, causing the evaluator to oversimplify them. The first impression tends to overwhelm information that emerges later. And mental models can cause evaluators to weigh individual attributes incorrectly, allowing irrelevant facts to outweigh critical ones. These effects occur in strategic decision making just as they do in hiring decisions.

MAP structures decision making to improve results with little additional effort.

MAP builds on Kahneman’s structured interviewing approach to enhance strategic decision making. Kahneman’s hiring system has interviewers rate candidates’ more relevant traits in a crucial intermediate step toward the final evaluation.

“MAP values intuition, provided that it is informed.”

MAP similarly calls for making mediating assessments of critical attributes, based on objective evidence, before decision-makers consider the final overall evaluation. These mediating assessments require little effort beyond the usual, but they can reduce effects from confirmation and availability bias, the halo effect, and logical errors, thereby increasing reliability.

The MAP approach relegates holistic evaluation to the last of three steps.

The steps of defining the mediating assessments, rating each assessment, and coming to a final decision making up the MAP approach. For one-off strategic decisions, the process begins with due diligence but asks the team to assign a rating for each issue. The board members review and accept or modify each assessment. They then consider the deal as a whole and vote. For recurrent decisions, the team determines the main factors that inform their decisions, and these become the basis for mediating assessments. The team now numerically rates each factor independent of the other factors. Last, the team reviews the individual assessments and only then turns to make a holistic evaluation and final decision.

About the Authors

Daniel Kahneman is the Eugene Higgins Professor of Psychology, Emeritus at Princeton University. He received the Nobel Prize in Economic Sciences in 2002 for his work (with Amos Tversky) on cognitive biases. Dan Lovallo is a professor of business strategy at the University of Sydney and a senior adviser to McKinsey & Co. Olivier Sibony is an affiliate professor of strategy and business policy at HEC Paris; an associate fellow at Saïd Business School, University of Oxford; and a consultant specializing in the quality of strategic thinking.