The Wall Street Journal had a column today by Jason Zweig on the role that bad group dynamics have likely played in much of the current mess and a short but useful list of ways to avoid bad financial decisions. I was quoted as saying, essentially, that groups bring out the best and worst in people, a theme that goes back to Freud and is bolstered by studies of group decision-making.
I especially liked two of Jason's points:
- Reframe the question. Committees considering an important decision should break into a "pro" and "con" group, each developing the best arguments supporting its side. Individuals can do something similar by asking not only how much they will make if they are right but also how much they could lose if they turn out to be wrong. Try coming up with three reasons against an investment as well as three for it.
When we discussed the above approach during the interview, I also suggested that authority can cause a real problem as people are sometimes afraid to contradict the leader. One way to deal with authority issues is to either simply leave the room of you are the boss, and better yet, leave and divide the the team into two smaller teams to each develop their own point of view -- this is exactly what President John F. Kennedy did with executive committee during the Cuban Missile Crisis, as I wrote in this post on Management by Getting Out of the Way.
A related point that Jason and I discussed is group size. It didn't make in the article, so I will explain a bit here. One of the things I worry about when I see the groups making all these investment decisions is that they are simply too big. J.Richard Hackman -- the world's leading group effectiveness researcher -- argues and presents evidence that once groups get over five or six people, productivity and group process begins to suffer (see his explanation here or in his book Leading Teams) -- in fact, one of Hackman's studies showed that the optimal team size was 4.6 people! Of course, the exact best number depends on the task and on the how experienced and skilled the team is at working together.
To return to the article, I also especially liked the advice Jason relayed from Harvard's Max Bazerman, as it is so strongly supported by evidence -- but something that few investors or investment committees seem to be able to bring themselves to do:
- Define the default position. Max Bazerman, an expert on decision-making at Harvard Business School, suggests that investors start with the assumption that the ideal portfolio is a diversified basket of low-cost index funds. Any deviation from that strategy should require extraordinarily compelling evidence.
If you are interested in learning more about how to avoid the worst decision traps, Max has written a wonderfully useful book: Judgment in Managerial Decision Making.
P.S. On a much different subject, I am also grateful to Jason for telling me one of the best asshole revenge stories I have ever heard.