I am sure you are, like me, a little tired of the words “unprecedented” and “Covid”. It seems like these days, all we hear are these words such that we are becoming numb to them. So for today’s article, I thought I should talk about something totally different; framing – more specifically, narrow framing. I also want to talk about risk – and loss - aversion.
WOULD YOU INVEST?
I was once facilitating a strategic thinking workshop for managing directors from a group of companies in the fashion industry. There were seven MDs in the room, each of whom runs a chain of stores for a certain brand. Seated at the back of the room was the Group CEO, who was listening and taking it all in.
Firstly, it has to be known that each chain is independent of the other, even though it comes under the same group. Second, each MD is fully empowered to make any decision they see fit for their own brand to grow.
So I posed this question to all of them:
Supposing each of you has a chance to invest $1M on a new business opportunity. These are totally independent opportunities; so what one of you does, does not affect the other. Now, there is a 50% chance that you will make a profit of $2M and a 50% chance that you will lose the $1M. How many of you will take this opportunity?
Before you read on, ask yourself if you were in the shoes of one of the MDs, would you take that opportunity, and plonking down the $1M (which you have in spades of to invest, by the way!)
Out of the 7 MDs in the room, only 2 raised their hands.
Then I turned to the Group CEO and asked, “How many of these opportunities would you undertake?” “All 7!” he replied.
I smiled, and said to him, “Then you have a problem! Because only 2 out of your 7 MDs agree with you!”
The class laughed nervously. (It is good that I am an external consultant. I can tell it as it is to any person and not fear for any political repercussions. The truth is the truth.)
Turning to one of the MDs who declined to invest, I asked him, “So why did you choose not to invest in the opportunity? Are you aware that the net expected value is positive?” The MD nodded. “So, if it makes sense to invest, then why didn’t you?”
“Because if the project was a success, I will probably get a bonus of about 4 months, but if it failed, I might lose my job. And I do enjoy my job and I plan on keeping it for a long time. So, why risk another 10 years of income for just 4 months of bonus?”
I glanced at the CEO. He smiled knowingly, but kept quiet. I spoke directly to him, “Perhaps you need to incentivize risk-taking in this group; because what it is currently doing is making you lose more than 70% of the opportunities by creating risk-averse executives.”
And herein lies the rub. If we looked at all the 7 projects as a portfolio, no one will feel that their job was on the line. But if we framed this narrowly, that each MD was responsible for one project; and success or failure was also the responsibility of one MD, then the risk aversion heuristic will kick in.
I have trained many executives over the past 15 years on the skills to make the right decision EVERY TIME, and I have always predicated it on the use of the right process and the right inputs. What I have also predicated it on, is a rational decision maker. However, from the example here, we realise that humans are not all rational. The emotional aspect of our humanness creates mistakes in us. And because of the primacy of the limbic brain, where emotions rule over logic, we tend to err on the side of emotions, and make the wrong decision. We cover all these in our critical thinking program. But I want to focus today on the way we frame situations narrowly, and how that impacts the way we make decisions; decisions that are sub-optimal.
Because, you must agree with me; the MDs were “right” in their assessment of the risk. Why risk 120 months’ salary for only 4 months’ bonus, even if it is the more rational option to invest? In the narrow focus, the risk is too high to accept. And clearly, there is also something wrong with the way they incentivise risk-taking; if the Group penalizes the downside of an investment, then obviously no one will take the risk. This is the impact of narrow framing.
But if the Group views this with a much larger frame – that it is conducting experiments on 7 fronts – then one failure is nothing compared to the potential for six successes! Indeed, with a net expected value of $500,000 per opportunity, this portfolio has an expected return of $3.5M! Now that is not chump change!
WHOSE RESPONSIBILITY IS IT?
So, narrow framing or broad framing – whose responsibility is this? This falls squarely on the leader, and in this case, the Group CEO. The reason why the Group had not been able to catch the next wave of growth is the way they framed the opportunities, and also the way they took leadership for them. The MDs were not motivated to take the risks because the Group culture did not reward risk-taking. So if individually, the MDs were averse to risk, then collectively, the Group would be averse to it, even if the CEO was not. Clearly this is the CEO’s responsibility, but does he see it that way? Does he think that he is in the way of Group risk-taking?
The CEO was blind to his actions, or lack thereof, in creating a portfolio mindset, in enlarging the frame. His words and his actions were in total contradiction, as evidenced by the admission of the MDs. So, while the CEO talks the collective risk-taking message, his actions of penalizing individual MDs says otherwise. He has been framed by his own thinking! And if anyone is responsible for a lack of Group risk-taking, he is!
EMBRACING THE GROUP GROWTH MINDSET
What the CEO needs to do is the create a group growth mindset, even if individually the mindsets are fixed. He needs to embrace the broad frame and encourage the MDs to get in on the portfolio mindset. Here are four focuses that he can do to get that going:
(1) Focus on a collective outcome
On a narrow focus, the failure of one project is 100% focussed on the individual. But on a broad focus, one project failure is only 14% on the Group. By focusing on a larger perspective, the cost of failure, and the “fatality” of failure, is greatly diminished.
(2) Focus on lessons learnt
There is a lot more we can learn from failure than we can from success. This is because success reinforces our current knowledge, and there is nothing new to gain from that. On the other hand, failure accentuates the fact that we did not know what we did not know when we got into the project. That also now enlarges our knowledge field, and allows us to pay attention to these hitherto “unknown unknowns”, moving them into “known unknowns” and finally into “known knowns”. This process of evolutionary learning can only come from failures, and from lessons learnt from these failures.
(3) Focus on constant improvement
Getting from “unknown unknowns” to “known knowns” requires constant learning, constant improving. This requires us uncovering steps taken, examining the impact of each step, and then changing them to reach a new outcome. We cannot rush the process; instead, we need to constantly change and improve. Perfection never occurred in a single bound – it is a cumulation of improvements that, taken altogether, brings us from ignorance to intelligence.
(4) Focus on group incentive
Finally, in changing the culture, we need to move away from individual incentive to group incentive. Each MD will need to feel a part of the collective portfolio of projects whose failure allows the others to succeed. Even if 4 projects failed, the other 3 can cover the gaps. And this is what makes group innovation work; not individual effort and reward, but group effort and reward. The path to success is littered by the skeletons of failure. Let us celebrate those skeletons.
YOU ARE NOT ALONE
If you think that the Group CEO in the example is unique, you are wrong. There are many people like this; they embrace the narrow frame when they should expand their perspective. The above points will help. But what else can help is adopting the growth mindset; of seeing failure as a means of success. After all, if we have never risked failure, how do we know that we have applied ourselves well enough?
If you have never uncovered your own growth mindset, why not find out for yourself with our FREE growth mindset assessment at www.growthconsultingtest.com? And if you decide not to, perhaps that there is your answer!