When the blind lead

It’s called confirmation bias. When facing a major decision, one exhibits an unwillingness to admit conflicting data – no matter how ...

It’s called confirmation bias. When facing a major decision, one exhibits an unwillingness to admit conflicting data – no matter how salient – to influence a closed point of view. Peter S. Cohan examines the disease and offers a cure.
When the blind leadIt was Jonathan Swift who observed, “There is none so blind as they that won’t see.” Remember that verbal gem and you are well on your way to understanding confirmation bias (CB). Quickly defined, CB is a decision maker’s tendency to lap up information that reinforces his or her beliefs about the world and ignore information at odds with them. CB is thus a true “bias”: decision makers can, if critical information is ignored, skew not only how they see the world but also how they act as a result of that limited view. Make no mistake: such behaviour can affect the destiny of an entire corporation.

It’s easy to explain many business disasters by citing the confirmation bias of key individuals who influenced, or outright determined, the path taken by troubled companies. For example, looking back on the doomed January 2001 merger of AOL and Time Warner at a price of $207 billion, I’m by no means the only one who asked why such a “perfect” merger went on to lose billions of dollars in net income. Almost seven years later, the company is reportedly worth $126 billion less than it was at the time of the deal. But the cause of this calamity is not subterfuge, it’s confirmation bias.

At the core of the problem was Gerald Levin, then Time Warner CEO, who acted alone – deliberately ignoring the advice of his subordinates who did not want to do the deal – because Levin was determined to leave Time Warner with a memorable legacy. Levin forced the deal to close without considering objectively its potential risks. He kept all but a small number of Time Warner executives in the dark about the pending deal until hours before it was announced. Moreover, even fewer Time Warner executives supported the proposal. Further evidence that Levin’s CB crowded out any objective consideration of the deal’s pros and cons includes the facts that he allocated only three days to due diligence for the $165 billion merger and that many AOL top managers sold large chunks of stock shortly after the deal closed – including founder Steve Case, who sold shares worth $100 million.

Despite this, Time Warner could have got out of the deal in the year that elapsed after its January 2000 announcement. During this time, the dot-com world was crashing; executives at Time Warner were less than impressed with the upstart managers at AOL; and AOL, under government scrutiny, investigated and admitted it had improperly booked at least $190 million in revenue. If Levin had any second thoughts about the deal, this significant accounting fraud would have given Time Warner the grounds it needed to legally withdraw. But Levin bulldozed ahead – leaving behind a legacy, if not the kind to which he aspired.

The most astute studies of AOL Time Warner have all concluded that the merger was fraught with CB due to the relative isolation of the decision makers and their tendency to seek out only information that reinforced their belief in the overwhelming need to complete the transaction quickly. There are none so blind. . . .

Confirming a bias

A simple model (see Figure 1) will help to explain confirmation bias in action.

Reality flows into the filter, depicted by the triangle that categorizes information into two buckets: information that is inconsistent with management’s CB (depicted by the box with the negative sign) and information that reinforces management’s CB (illustrated by the box with the positive sign). The inconsistent information is shunted aside as irrelevant noise, data that does not warrant management’s attention – while ambitious underlings hurriedly forward reinforcing information to management.

Management parses information that passes through the CB filter into two categories: a threat against which the firm must defend itself or an opportunity from which the firm must profit. In contested markets, incumbent managers’ CB may cause them to mis-categorize the signals that they receive, leading them to adopt strategies that may put them at a competitive disadvantage against upstarts that categorize information realistically and profitably.

A critical source of CB is the incumbent’s decision hierarchy. Simply put, many large organizations reserve all strategic decisions for top management – encouraging lower level employees with more intimate knowledge of market realities to hear and obey top management’s commands rather than exercise sound business judgement. It is frequently due to such decision hierarchies that CB is irreversibly embedded in the organization’s approach to parsing market signals.

Learning from a student

One of my MBA students encountered the destructively critical power of management that ignored his good advice because it clashed with their CB.

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