The Psychology of Decision-Making: After the Recession
As the economy improves, middle market executives can move past risk-aversion and focus on growth.
By Wendy R. Ulaszek, Ph.D. & Ray Whitacres
in Perspectives Newsletter (a Harris Bank Publication)
When the recession and subsequent economic downturn hit, many executives of mid-sized companies took necessary steps to mitigate losses and protect their businesses. In some cases, business leaders went into “survival mode,” leading to slower decision-making, more conservative recruiting, and general risk-aversion. Despite the fact the economy is recovering, many executives today are still employing these tactics and finding that overcoming the effects of the downturn is a challenge.
History shows that memorable events—such as the recession—can shape how an individual thinks and behaves. In the business world, when these thoughts and behaviors are no longer relevant in today’s environment, a “faulty bias” develops among decision-makers. This can have a quantifiable impact on employees and a company’s performance.
Faulty biases are surmountable, and when executives take steps to address them, the business as a whole is likely to respond positively. A March 2010 McKinsey Quarterly study, “The Case for Behavioral Strategy,” evaluated nearly 1,000 companies and found that when some of these organizations eliminated faulty biases from their decision-making processes, returns increased 7%.
Business leaders can look to key economic indicators as signs of the significant opportunity for growth that exists in today’s improving economy. Among other factors, accelerated job creation and a surge in the housing industry are making CEOs more optimistic now than they have been in years. Shifting from the survival mode strategies of the recession into a more aggressive, optimistic approach can help executives take advantage of the opportunities in today’s market and put their companies on a path toward sustainable growth.
Uncertainty: Opportunity or Challenge?
For some executives and C-suite decision-makers, a fluctuating economy presents an opportunity. They pursue mergers and acquisitions, identify a niche market for a new product, or buy assets at temporarily low prices. For others, economic uncertainty means risk. In turn, they rely on past patterns of decision-making and enter survival mode.
No matter how leaders approach decision-making during difficult economic times, they can benefit from looking beyond traditional factors like market and competitor data, economic trends, and business best practices. Overcoming obstacles requires flexibility in a business’ approach, as well as its leaders’ mindsets. This shift in thinking and approach can start once psychological behaviors that helped executives survive during and soon after the recession are replaced with behaviors that suit the current economic climate.
‘Learned Helplessness’ in Business
While the economy is improving, a mindset of uncertainty remains for some executives. On a scale typically ranging from zero to 250, the Economic Policy Uncertainty Index hovered just below 200 in late 2008, in response to the economic crisis. After a series of oscillations, including a spike in 2011, as of March 2013 the index was just over 150. While down from the recession, that number is high compared to historical norms—from July 2003 to July 2007 it averaged 79.
This elevated level of uncertainty reflects deeper psychological trends. In addition to posing business challenges, adverse economic events have the potential to create a lingering feeling of learned helplessness among business executives. Learned helplessness takes effect when, after repeated exposure to uncontrollable situations, business leaders begin to feel that they are unable to affect outcomes and begin to believe they are powerless to overcome difficult events.
The economic collapse that began in late 2007 reminded all business leaders that some elements of their companies’ success (or failure) always remain out of their control. As a result, executives suffering from learned helplessness may be overly risk-averse or avoid making decisions altogether when faced with today’s uncertain economic conditions. However, it is during these times that displaying confidence and taking action is especially critical.
Overcome Risk-Aversion and Shift Toward Growth
Executives’ personal perceptions can affect not only their own decisions but also their employees’. For example, while operating amid uncertainty, employees might adopt their leaders’ perceptions and dismiss the importance of innovation if that is the precedent the C-suite has set.
These behaviors can create an environment of risk-aversion that prevents companies from realizing the benefits of emerging opportunities.
However, executives’ attitudes towards risk are not fixed. Instead, they are learned and, thus, can also be unlearned. Executives whose companies have gone into survival mode or whose employees are displaying signs of learned helplessness can recognize the situation and temper it by fostering a positive, optimistic environment.
Creating an environment that supports growth requires leaders to help ensure their own actions coincide with the strategies they have developed and communicated to employees.
Steps to Create Positive Corporate Culture
Leaders who recognize that uncertainty is having a negative effect on their employees and companies are in a position to take action. For example, they can seek feedback from trusted advisors or reflect on how current decisions and attitudes differ from those made under more stable economic conditions.
Beyond self-reflection, leaders can work with others in their organizations to transform corporate culture and increase company-wide confidence in many ways, including:
- Revisit the company’s mission and values. Communicate the mission and values throughout the company, and remind everyone of the connection between those values and the company’s strategy.
- Enlist communication champions. Identify employees who have an intrinsic ability to lead but may not have formal leadership responsibilities—your organizational champions. Charge them with promoting the mission and values at the core of an innovative, positive corporate culture.
- Conduct a walk through. Understanding where changes are needed starts by understanding where your company currently stands. Ensure that you’re not too far removed from company culture by conducting an office walk through. Pretend you are a client and interact with your business and employees the same way a client would.
- Share your perspective. Clear communication and transparency, be it in-person or virtually, can build morale, decrease anxiety, and encourage a resurgence of innovativeness and creative problem-solving. When economic conditions fluctuate and executives take a renewed interest in internal operations or make difficult business decisions, employees need reassurance that these actions support the firm’s ultimate goals.
- Learn from your own successes. Recalling your company’s past successes can reduce learned helplessness by combating the belief that challenging times are permanent and insurmountable. Although economic variables may be different today, what can you extrapolate from your past successes to help make good decisions for the future?
- Benchmark. Look to your competitors and industry associations to identify best practices and on which you can base future decisions. Ask yourself: “What can I learn from what other companies have dealt with, and how can I apply those lessons to my business?”
- Break down organizational silos. Take a team leader from a thriving area of your company and put him or her in charge of a struggling line of business to create cross-functional teams full of new ideas and valuable experience. This action helps break down existing silos that impede the optimal use of resources.
- Run pilot projects. Low-cost, internal initiatives are effective tools to gauge the potential of new ideas with minimal impact on a business’ bottom line. Emphasize that, no matter how the pilot projects turn out, your company gleans valuable information. Doing so will prevent employees from becoming discouraged at perceived “failures” that can actually be learning experiences.
- Increase Entrepreneurial Orientation. Entrepreneurial Orientation encompasses autonomy, competitive aggressiveness, innovativeness, proactiveness, and risk-taking. A strong Entrepreneurial Orientation ties back to financial performance, firm survival, and growth.
In considering these steps, you can build and sustain momentum by quickly implementing short-term projects that are likely to yield positive results—which can be determined during the walk through—while also instituting plans for some longer-term and larger-scale initiatives. In addition to these internally focused strategies, executives can further buffer their companies against the adverse effects of uncertainty by turning their focus outward.
For example, consider engaging consultants to improve efficiency or hire employees from different industries to provide new perspectives and ideas. Forming an advisory board of outside experts can provide extra support, and these fresh voices can help an organization transcend entrenched attitudes and champion new ideas.
Navigate Today’s Economy with a Balanced Approach
In unpredictable economic conditions, effective leaders remain both strong and flexible. They maintain or renew confidence in their ability to handle unexpected circumstances and are willing to consider new perspectives. Executives work best when they balance intelligent preparation with the appropriate level of caution. Neither extreme leads to optimal decisions. Psychologically, taking the same balanced approach can improve business results.
When executive leaders believe they can make a positive impact, they reinforce the notion that they are agents of change and can positively influence outcomes. That belief decreases learned helplessness and increases a sense of empowerment and confidence that leaders can make things happen—no matter how difficult a situation might be. With this mindset, executives can capitalize on re-emerging opportunities in today’s economy. ▪
Wendy R. Ulaszek is a family business advisor and a frequent collaborator and Senior Associate with Lansberg Gersick, a consulting firm in New Haven, Connecticut serving family businesses, family offices, and family foundations worldwide.
Ray Whitacre is Head of IL Diversified Industries Group atBMO Harris Bank
Source: Perspectives, a BMO Harris Bank quarterly publication, is designed to add value and thought leadership for key decision-makers through relevant and important trends that help them make informed decisions. May 2013
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