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How Leaders Can Use Better Judgment

By Sunil Deshmukh, CMA
November 1, 2022

Good judgment comes from experience, and the best finance leaders do postmortems to learn from their previous bad decisions.

 

Normally the cognitive process of forming a judgment or making a decision serves us very well, but in some instances our reasoning may lead us to the wrong conclusion or outcome. Leaders must be flexible and humble enough to recognize their own poor judgment, analyze the cognitive biases and flaws in their reasoning, attempt to correct their mistake and mitigate its impact, and then do better next time.

 

In any rational decision-making process, we follow a pattern to come to a final decision. This typically involves steps such as defining the problem, identifying and weighing the criteria, prioritizing the various factors, considering a range of options, rating each alternative based on the priority or weight assigned, and coming to the optimal decision.

 

Psychologists make a useful distinction between System 1 and System 2 thinking or cognitive functioning. System 1 thinking refers to intuition, which is fast, automatic, effortless, implicit, and emotional. System 2 refers to reasoning that’s slower, conscious, effortful, explicit, and logical. In most situations, our System 1 thinking is sufficient, but System 2 logic should influence our most important decisions. Many leaders place more trust in their intuition, which is System 1 thinking. That can serve them well in some cases but can also lead to judgment errors.

 

PSYCHOLOGICAL FRAMEWORK

 

People rely on a number of simplifying strategies to make decisions without the exhaustive application of an algorithm. These are called heuristics, mental shortcuts that usually involve focusing on one aspect of a complex problem while ignoring other facets of it. They’re useful, especially when making less important decisions, but can sometimes lead to severe decision-making errors.

 

There are various incarnations of heuristics. With availability heuristics, people assess the frequency or likelihood of a particular cause and effect of an event by the degree to which information related to that occurrence is easily recognizable or available (e.g., we tend to buy stocks of companies that are known to us, even if such name recognition causes them to be overvalued).

 

Representativeness heuristics are mental shortcuts or generalizations that people use when estimating probabilities. People tend to look for traits an individual may have that correspond with previously formed stereotypes when making a judgment about what an individual is likely to do or guessing how an event will probably transpire. Managers also use representativeness heuristics, often unconsciously, to predict an employee’s performance based on how a category of worker or personality type (e.g., extroverted salesperson) has performed previously.

 

With affect heuristics, most of our judgments are evoked by an emotional response, an evaluation that may occur before any higher-level reasoning takes place. Leaders may apply this type of heuristics while doing an employee performance appraisal. Environmental conditions that change a person’s mindset and attitude may also influence their judgment. Stock prices often go up on a sunny day, presumably due to investors’ good mood and optimism created by the pleasing weather.

 

The Miracle on the Hudson, when an airplane collided with a flock of birds shortly after takeoff and needed to make an emer­gency landing, is an example of herustics-based judgment. The pilots used the gaze heuristic—a type of mind-body coordination to execute the correct motion to achieve a goal factoring in one main variable (e.g., moving our hands to catch a ball in motion)—to safely land the plane in the Hudson River near New York City.

 

MASTERING THE POWER OF JUDGEMENT

 

People often make judgment calls based on their past experiences, good or bad. Initially in my corporate job, I tried to recruit professionals purely based on merit, but later I realized that it isn’t easy to retain some intelligent people with job-hopping tendencies who need new challenges all the time. Now I factor in the likelihood that a candidate will stay with the company for an extended period of time, judgment based on experience, practice, rational thinking, and cultural fit.

 

We must learn to analyze our own abilities to make judgments and apply them to different situations. To master the power of judgment, leaders must make a decision, gauge the results, and examine what went right and what went wrong, if anything, and why.

 

The following are key insights for mastering the power of judgment:

 

  • Take note of the factors informing your judgment, as well as good and bad outcomes, on
    a regular basis.
  • Reflect on significant decisions and why you made each one.
  • Based on experience, create your own rules of thumb and shortcuts that you can use as cognitive tools to make quick decisions and judgments, but beware of biases.
  • Check with your friends and professional peers who’ve been in similar situations, and compare how they acted with your actions.
  • Don’t overcomplicate your decision-making calculus, and be willing to trust your intuition, even if it overrides your logic—but not if it conflicts with your ethics.
  • Be willing to slow down and use System 2 reasoning if you’re torn or unsure about a decision.
  • If you’ve failed by making a poor judgment, analyze what led to the bad outcome and take corrective measures.
  • Use common sense and develop your own decision-making rubric.

 

These simple, efficient rules work well in most circumstances, but they can lead to systematic deviation from logic, probability, or expected behavior based on rational choice theory. The resulting errors are typically due to cognitive biases, which affect people’s choices in situations such as valuing a house, deciding the outcome of a legal case, making an investment or hiring decision, managing an accounting team, or leading the finance function.

 

Regardless of their technical know-how, the best leaders understand that judgment is a powerful ability but that they’re human and not perfect. Only by examining their mistakes in judgment can they continue to improve this crucial skill.

 

Sunil Deshmukh, CMA, is a leadership coach, mentor, and independent director. He’s also a member of IMA’s Mumbai Chapter. You can reach him at sd@sunil-deshmukh.com.
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