How Group Decisions Go Wrong: Jason Zweig in the Wall Street Journal

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.

Comments

[Higher Education Blog]

Well..I have always not been good in Group Discussions :-)

[Sharon Dexter]

Good post, thanks and so on topic and true.

[Wally Bock]

Great and helpful insights, Bob. I think the issue of rank in the room is often minimized by bosses. I hear them say, "Well, that's the general rule, of course, but my people trust me and talk to me."

But they don't. If you're a boss you can count on two things. First, the dynamics of the room change when you enter and when you leave. And, second, everything you hear is filtered through at least one person's self-interest.

[Dwayne Phillips]

Be congruent. Ask "obvious" questions. Understand that there is always another alternative AND as adults, we are free to say it, hear it, think about it, discuss it. Taboo is for four-year-olds.

[Project Reformer]

In the work I do with project teams we've seen the biggest source of bad decisions, waste and bad projects is "not speaking" and "not listening." Invariably, someone in a group has something they could offer, but they don't. Other times someone in charge is focused on some issue/concern and is not listening when someone speaks. Either way, we get less than we could have. Large group size certainly contributes to this. But it doesn't explain it all. We continue to live with misguided notions of authority and hierarchy. Even when we can rationalize different behavior our bodies are telling us to keep our mouth shut. There is a lot of work to do to change this. And it must change.

[wildcat]

I like the idea about coming out with three good and 3 bad reasons of why to invest. Your money is very important and you have to know what you are getting into. I think if you that then you have a good grasp on where you should invest because you investigated pretty thoroughly.

[Mr. Chow]

Your blog is very informative...will refer to it in mine.