Cognitive Bias, Scott Adams and Troubled Companies
We hear a lot about cognitive bias these days (and confirmation bias – a type of cognitive bias), an extraordinarily important concept in life, business and marketing, most recently made famous by Scott Adams’ book Win Bigly: Persuasion in a World Where Facts Don’t Matter, which simplistically presents the persuasion techniques used by President Trump and explains the related so-called Trump Derangement Syndrome. More about excalibur is a classic
A cognitive bias is a mistake in reasoning, evaluating, remembering, or other cognitive process, often occurring as a result of holding onto one’s preferences and beliefs regardless of contrary information. As Scott Adams would say, we all perceive information through a filter, a movie playing in our head. We start with the answer, seek facts to support it and ignore facts that do not.
Cognitive bias is a huge issue at times of stress, including for management and directors of troubled companies, because we seek comfort by falling back on our pre-determined narrative. We ignore or rationalize contrary facts. We spin a tale of success that is just around the corner when we think how the company need cash now.
Those working with troubled companies regularly see examples of cognitive bias because: i) it happens all the time; and, ii) it is easy for outsiders to identify fact distortion because we have different filters. Whereas management sees the big sales contract, economic rebound or new financing right around the corner, fixing all of the financial issues, outsiders see the negative trends that require more concrete and controllable change.
We have previously posted about the importance and difficulty of identifying a trouble company HERE and HERE. Many others in the industry have written of the issue as well. For example, HERE is an article by PWC intended to help directors identify and be aware of financial distress.
Cognitive bias is a fact in troubled companies. So, what can you do about it? Here are two suggestions:
- Broaden your circle of influencers with a Board of Directors, Board of Advisors, or independent group such as Sinclair Range and be receptive to their thoughts and interpretations. Know that people have different filters and therefore will see facts differently. Listen and be open to change.
- Monitor your business quantitatively by tracking relevant key performance indicators (KPI) that are consistent and stable. When a KPI reveals a negative trend, do something about it and, specifically, go back to point 1 – don’t rationalize the negative trend as short term or change the KPI to fix the problem. More on key performance indicators can be found HERE.
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