Are you being framed by your own thinking?

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.”

NARROW FRAMING

And herein lies the