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For two scholars representing opposing schools of thought, Daniel Kahneman and Gary Klein find a surprising amount of common ground. Kahneman, a psychologist, won the Nobel Prize in economics in 2002 for prospect theory, which helps explain the sometimes counterintuitive choices people make under uncertainty. Klein, a senior scientist at MacroCognition, has focused on the power of intuition to support good decision making in high-pressure environments, such as firefighting and intensive-care units.
In a September 2009 American Psychology article titled “Conditions for intuitive expertise: A failure to disagree,” Kahneman and Klein debated the circumstances in which intuition would yield good decision making. In this interview with Olivier Sibony, a director in McKinsey’s Brussels office, and Dan Lovallo, a professor at the University of Sydney and an adviser to McKinsey, Kahneman and Klein explore the power and perils of intuition for senior executives.
The Quarterly: In your recent American Psychology article, you asked: “Under what conditions are the intuitions of professionals worthy of trust?” When can executives trust their guts?
Gary Klein: You need to take your gut feeling as an important data point, but then you have to consciously and deliberately evaluate it, to see if it makes sense in this context. You need strategies that help rule things out.
Daniel Kahneman: My general view would be that you should not take your intuitions at face value. Overconfidence is a powerful source of illusions, primarily determined by the quality and coherence of the story that you can construct, not by its validity. If people can construct a simple and coherent story, they will feel confident regardless of how well grounded it is in reality.
The Quarterly: Is intuition more reliable under certain conditions?
Gary Klein: We identified two. First, there needs to be a certain structure to a situation, a certain predictability that allows you to have a basis for the intuition. If a situation is very, very turbulent, we say it has low validity, and there’s no basis for intuition. The second factor is whether decision makers have a chance to get feedback on their judgments, so that they can strengthen them and gain expertise. If those criteria aren’t met, then intuitions aren’t going to be trustworthy.
Daniel Kahneman: This is an area of difference between Gary and me. I would be wary of experts’ intuition, except when they deal with something that they have dealt with a lot in the past. One of the problems with expertise is that people have it in some domains and not in others. So experts don’t know exactly where the boundaries of their expertise are.
The Quarterly: Many executives would argue that major strategic decisions take place in environments where their experience counts—what you might call high-validity environments. Are they right?
Gary Klein: I’d like to see a mental simulation that involves looking at ways each of the options could play out or imagining ways that they could go sour, as well as discovering why people are excited about them.
Daniel Kahneman: In strategic decisions, I’d be really concerned about overconfidence. There are often entire aspects of the problem that you can’t see. I’d add that the amount of success it takes for leaders to become overconfident isn’t terribly large. Some achieve a reputation for great successes when in fact all they have done is take chances that reasonable people wouldn’t take.
Gary Klein: Danny and I are in agreement that by the time executives get to high levels, they are good at making others feel confident in their judgment, even if there’s no strong basis for the judgment.
The Quarterly: So you would argue that selection processes for leaders tend to favor lucky risk takers rather than the wise?
Daniel Kahneman: No question—if there’s a bias, it’s in that direction. Beyond that, lucky risk takers use hindsight to reinforce their feeling that their gut is very wise. Hindsight also reinforces others’ trust in that individual’s gut. We associate leadership with decisiveness. That perception of leadership pushes people to make decisions fairly quickly, lest they be seen as dithering and indecisive.
Gary Klein: I agree. Society’s epitome of credibility is John Wayne, who sizes up a situation and says, “Here’s what I’m going to do”—and you follow him.
Daniel Kahneman: We deeply want to be led by people who know what they’re doing and who don’t have to think about it too much.
The Quarterly: Who would be your poster child for the “non–John Wayne” type of leader?
Gary Klein: I met a lieutenant general in Iraq who told me a marvelous story about his first year there. He kept learning things he didn’t know. He did that by continuously challenging his assumptions when he realized he was wrong. At the end of the year, he had a completely different view of how to do things, and he didn’t lose credibility.
The Quarterly: A moment ago, Gary, you talked about imagining ways a decision could go sour. That sounds reminiscent of your “premortem” technique. Could you please say a little more about that?
Gary Klein: The premortem technique is a sneaky way to get people to do contrarian, devil’s advocate thinking without encountering resistance. If a project goes poorly, there will be a lessons-learned session that looks at what went wrong and why the project failed—like a medical postmortem. Why don’t we do that up front? Before a project starts, we should say, “We’re looking in a crystal ball, and this project has failed; it’s a fiasco. Now, everybody, take two minutes and write down all the reasons why you think the project failed.” The logic is that instead of showing people that you are smart because you can come up with a good plan, you show you’re smart by thinking of insightful reasons why this project might go south. If you make it part of your corporate culture.
Daniel Kahneman: The premortem is a great idea. I mentioned it at Davos—giving full credit to Gary—and the chairman of a large corporation said it was worth coming to Davos for. The beauty of the premortem is that it is very easy to do.
The Quarterly: It sounds like you agree on the benefits of the premortem and in your thinking about leadership. Where don’t you see eye to eye?
Daniel Kahneman: I like checklists as a solution; Gary doesn’t.
Gary Klein: I’m not an opponent of checklists for high-validity environments with repetitive tasks. I don’t want my pilot forgetting to fill out the pretakeoff checklist! But I’m less enthusiastic about checklists when you move into environments that are more complex and ambiguous, because that’s where you need expertise.
Daniel Kahneman: I disagree. In situations where you don’t have high validity, that’s where you need checklists the most. The checklist doesn’t guarantee that you won’t make errors when the situation is uncertain. But it may prevent you from being overconfident. I view that as a good thing.
The Quarterly: What should be on a checklist when an executive is making an important strategic decision?
Daniel Kahneman: I would ask about the quality and independence of information.
The Quarterly: Could you explain what you mean by “correlated errors”?
Daniel Kahneman: Sure. There’s a classic experiment where you ask people to estimate how many coins there are in a transparent jar. When people do that independently, the accuracy of the judgment rises with the number of estimates, when they are averaged. But if people hear each other make estimates, the first one influences the second, which influences the third, and so on. That’s what I call a correlated error.
The Quarterly: Beyond checklists, do you disagree in other important ways?
Gary Klein: Danny and I aren’t lined up on whether there’s more to be gained by listening to intuitions or by stifling them until you have a chance to get all the information.
Daniel Kahneman: My advice would be to try to postpone intuition as much as possible. You do as much homework as possible beforehand so that the intuition is as informed as it can be.
The Quarterly: What is the best point in the decision process for an intervention that aims to eliminate bias?
Daniel Kahneman: It’s when you decide what information needs to be collected. That’s an absolutely critical step. This should take place fairly early.
Gary Klein: I think the process is that people make quick judgments about what’s happening, which allows them to determine what information is relevant. Otherwise, they get into an information overload mode. Rather than seeking confirmation, they’re using the frames that come from their experience to guide their search.
Daniel Kahneman: I’d add that hypothesis testing can be completely contaminated if the organization knows the answer that the leader wants to get.
The Quarterly: How optimistic are you that individuals can debias themselves?
Daniel Kahneman: I’m really not optimistic. Most decision makers will trust their own intuitions because they think they see the situation clearly. It’s a special exercise to question your own intuitions. I think that almost the only way to learn how to debias yourself is to learn to critique other people. I call that “educating gossip.”
The Quarterly: Do you think corporate leaders want to generate that type of gossip? How do they typically react to your ideas?
Daniel Kahneman: The reaction is always the same—they are very interested, but unless they invited you specifically because they wanted to do something, they don’t want to apply anything.
The Quarterly: Why do you think leaders are hesitant to act on your ideas?
Daniel Kahneman: That’s easy. Leaders know that any procedure they put in place is going to cause their judgment to be questioned.
The Quarterly: Yet senior executives want to make good decisions. Do you have any final words of wisdom for them in that quest?
Daniel Kahneman: My single piece of advice would be to improve the quality of meetings. People spend a lot of time in meetings. You want meetings to be short. People should have a lot of information, and you want to decorrelate errors.
Gary Klein: What concerns me is the tendency to marginalize people who disagree with you at meetings. There’s too much intolerance for challenge. As a leader, you can say the right things—for instance, everybody should share their opinions. But people are too smart to do that, because it’s risky. So when people raise an idea that doesn’t make sense to you as a leader, rather than ask what’s wrong with them, you should be curious about why they’re taking the position. Curiosity is a counterforce for contempt when people are making unpopular statements.
Imagine that we can record decision-makers’ solutions to a competitive-strategy problem. We also ask how confident they feel that they’ve found a good answer and how long it took them to find it. We can categorize them, then, like this:
I’ve got such a database of people, those who have entered the Top Pricer Tournament. The database includes business executives, consultants, professors, and students. I gave all of them the same unfamiliar but straightforward pricing-strategy problem.
Dozens of Tournament entrants said they were very confident in their strategies after making a fast decision, dozens said they were very confident after a slow decision, and so on. The phrases in the boxes are how I interpret the mindsets of the people in those boxes. In the analysis below I’ll leave out the respondents in the “I guessed” box because they seem unrepresentative of what happens in real life, where strategists work at strategy decisions until they’re confident in their answers or they’ve worked long enough to conclude they’re not going to make further progress.
In general, the I-already-knows, confident in their snap judgments, and the Now-I-knows, confident after pondering, tend to be older males. Male business students are also represented in the I-already-knows. The I-don’t-knows, unsure of their thoughtful decisions, tend to be somewhat younger. And females make up well over half of the I-don’t-knows, a much higher percentage than in the other mindsets.
Make your prediction: which of the three styles selected the best-performing Tournament strategies? The best-performing group: the I-don’t-knows.
Perhaps it’s about age: we gain confidence over time, but maybe not skill. Perhaps it’s about gender: rather than the conventional wisdom that females don’t have enough confidence, maybe males have too much. I don’t have enough data yet to assess those hypotheses. And perhaps the results will change as the sample sizes grow.
I think the essential lesson for competitive-strategy decision-makers is not so fast, in both senses of the phrase: take your time and don’t be so sure. That’s the mindset used by the new VP and the I-don’t-knows.
The willingness to apply that mindset is what separates the good decision-makers from the bad.
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The U.S. healthcare system in the U.S. is unnecessarily spending billions per year by continuing to use manual administrative processes for basic transactions, according to the 2015 CAQH Index.
Despite steady increases in the industry adoption of HIPAA electronic administrative transactions, CAQH, a nonprofit dedicated to streamlining the business end of healthcare, recently highlighted an opportunity to save an additional $8 billion each year.
According to CAQH Explorations, more than $31 billion each year is spent by healthcare providers conducting basic business transactions with health plans. A good portion of this expense can be attributed to resource-intensive manual processes such as phone calls to verify patient coverage, or mailing claims and paper checks.
“An industry-wide transition to replace manual processes with electronic, real-time transactions is reducing the cost of doing business in healthcare and meaningfully impacting efficiency, productivity, and data quality,” said CAQH’s new report.
Adoption of fully electronic transactions continues to vary significantly. Nearly 94 percent of claim submissions, 71 percent of eligibility and benefit verifications, 61 percent of claim payments, 57 percent of claim status inquiries, and 49 percent of coordination of benefits were designated as fully electronic, while only 10 percent of prior authorizations and six percent of referral certifications were.
Despite increasing adoption of fully electronic transactions, the volume of telephone inquiries remained stable for both eligibility and benefit verifications and claim status inquiries.
The direct labor cost per transaction continued to vary across transactions and methods. For healthcare providers, manual transactions were far more costly than electronic transactions. On average, each manual transaction costs providers and health plans $2 more than each electronic transaction. For health plans, direct costs averaged $2.30 per manual transaction and $0.04 per electronic transaction, and for healthcare providers, direct costs averaged $3.54 per manual transaction and $1.34 per electronic transaction. The industry (providers and health plans combined) cost averaged $5.87 per manual transaction and $1.34 per electronic transaction. Taking these numbers into account, transitioning from fully manual to fully electronic processes could save commercial health plans and healthcare providers approximately $8.5 billion annually.
CAQH outlined several actions to deliver this savings. All require a good deal of coordination between business and government.
- Share and expand best practices to increase adoption of electronic transactions and reduce utilization of manual transactions.
- Evaluate sufficiency of current government regulations and federal strategic plans to support broad adoption of fully electronic transactions.
- While not yet instituted, the ACA legislation requires health plans to formally demonstrate compliance via certification.
- Furthermore, efforts to transition to electronic transactions are driven and financed by individual health plans and healthcare providers, and initiatives to increase adoption often compete with other priorities for resources. There is currently a lack of strategic coordination among these initiatives.
- Increase targeted government and industry-led efforts to reduce adoption barriers.
- Continue systematic review of business processes for potential improvements of technical and policy requirements that can improve efficiency and reduce cost.
- Improve uniform and systematic tracking and reporting of adoption – and related cost savings. The two components of this recommendation are:
- Adoption and basic costs: Efforts should be made to implement and maintain routine and systematic data collection within health plans and provider organizations that can both monitor adoption of electronic transactions and accurately estimate cost savings.
- Correlating adoption of electronic to reduction in manual processes.
Are you making critical decisions based on inaccurate data? Are inefficient processes eating away at your time and your company’s bottom line? Even worse, is this inaccurate data impacting customer experience and putting your business at risk?
In a Deloitte study of 7,000 organizations this year, 89% of executives rated “strengthening the leadership pipeline” an urgent issue. That’s up from 86% last year, and the trend makes sense. Organizations are continuously promoting people into management, and those new leaders struggle with the transition. To help them in their new roles, companies spend almost $14 billion a year on courses, books, videos, coaches, tests, and executive education programs — and such spending rose 10% last year.
But there’s little evidence that much of this works. Barbara Kellerman from Harvard, Jeffrey Pfeffer from Stanford, and numerous other experts have pointed out that the development market is filled with fads — slick behavioral models and fun, engaging tools — that don’t really move the needle.
Here I'll share some findings from a study my colleagues and I just completed at Deloitte. We surveyed and interviewed executives from more than 2,000 companies, asking extensive questions about how they develop leaders, how their companies are managed, how they coordinate their work, and what their organizational culture looks like. We mapped this data against dozens of financial and leadership metrics, clustering companies into four groups (ranging from low- to high-performing). Unlike other studies in this vein, we didn’t examine leadership development, per se — we analyzed the impact of different management practices on business performance as a whole.
Here’s what we learned about companies that have strong leadership pipelines and strong financial performance:
First, they focus intently on culture. They talk about it, and they live by it. People in the company know what it stands for, and this gives them freedom to lead in different but complementary ways.
Second, these companies believe in matrix management and risk taking — both attributes are highly predictive of long-term revenue per employee and gross profit margin. A matrixed organization forces leaders to collaborate beyond boundaries. To be effective, they must build networks, move from role to role, and build depth of understanding across the business. Leaders’ growth in these areas leads to enduring growth for the enterprise.
Third, these companies believe in learning through exposure. They develop leaders through interactions and relationships with colleagues, experts in their field, and customers, and through work in new contexts.
Fourth, these companies believe in knowledge sharing. They have after-action reviews, they talk about bad news, and they exhibit traits of what we call a “learning culture.” They are inclusive and create an environment where everyone can speak up, so problems are brought to the surface quickly.
And fifth, while these companies do have leadership “programs,” they are embedded in the business, and HR does not operate alone. One major pharmaceutical provider embeds senior HR leaders in each unit to make sure leadership discussions, programs, and ongoing assignments are relevant to the business — yet also coordinated with other efforts throughout the company. And these HR partners are rotated into and out of the business units, so they all have line leadership experience.
Organizations that follow these basic rules bring in 37% more revenue per employee, are four times more likely to be efficient (measured through profitability), and are three times more likely to be market leaders and innovative by nature than the low performers we studied.
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