Managing through rose-coloured glasses

It is curious that so many managers act on the basis of shaky management theories when experience and data should suggest a different course of action.

by MIT Sloan Management Review

There are some patterns or syndromes that help to explain why. The 'extraneous correlation' syndrome suggests that the ability to predict outcomes means we can also understand the cause and effect. In the 1950s and 1960s, researchers found a high correlation between market share and profitability.

Managers concluded that they could increase profitability by increasing their share of the market. In fact, many discovered this was not the case and the reasons could have been easily spotted. For instance, the methods to increase market share such as making more acquisitions add to cost and hurt profitability. Belief and wishful thinking underpin the ‘gut-instinct' syndrome.

It can lead gullible managers into believing in chains of effects, such as happy employees lead to happy customers lead to loyal customers. Worse still, management scientists are encouraged to come up with new ideas and not to test existing theories, which leads to a stream of weak hypotheses.

Psychology tells us that the human brain holds on to the most rewarding view of events and that we 'believe' facts that conform to our views, even in the face of conflicting information or outright contradiction.

To avoid such mistakes, managers need to develop a more sceptical approach and challenge preconceived notions and assumptions.

Managing through rose-coloured glasses
Timothy L Keiningham, Terry G Vavra and Lerzan Aksoy
MIT Sloan Management Review, Vol 48, No 1, Fall 2006

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