LESSONS FROM " GOOD MINDS: " HOW CEOS USE INTUITION, ANALYSIS AND GUIDING PRINCIPLES TO MAKE STRATEGIC DECISIONS

LESSONS FROM “GOOD MINDS:” HOW CEOS USE INTUITION, ANALYSIS AND GUIDING PRINCIPLES TO MAKE STRATEGIC DECISIONS Jaana Woiceshyn Haskayne School of Business University of Calgary Calgary, Alberta T2N 1N4 Canada 403-220-7707 woiceshy@ucalgary.ca Citation: Woiceshyn, J. 2009. Lessons from ‘good minds’: How CEOs use analysis, intuition and guiding principles to make strategic decisions. Long Range Planning, 42(3): 298-319 BIOGRAPHICAL NOTE Jaana Woiceshyn is Associate Professor in the Strategy and Global Management Area at the Haskayne School of Business, University of Calgary, Canada. Haskayne School of Business, University of Calgary, Calgary, Alberta T2N 1N4, Canada Email: woiceshy@ucalgary.ca 2 LESSONS FROM “GOOD MINDS:” HOW CEOS USE INTUITION, ANALYSIS AND GUIDING PRINCIPLES TO MAKE STRATEGIC DECISIONS Business executives are faced with complex decisions in an increasingly turbulent world due to globalization of markets and rapid technological change. For example, how do they respond to new competition or to shifts in demand due to innovative new technologies? Most research suggests that decision makers in complex situations under time pressure bypass deliberate, rational analysis and depend on their intuition or cognitive shortcuts such as scripts and schemas. Based on a study of 19 oil company CEOs, this paper argues that successful executives manage complex decisions, not by substituting intuition for rational analysis, but by combining them in two iterative processes: 1) integration by essentials (IBE) and 2) spiraling. IBE entails identifying fundamental causeeffect relationships and forming and using guiding principles based on such relationships. IBE governs intuitive (subconscious) storage and retrieval of all the relevant knowledge bearing on a decision. This allows spiraling, or rapid evaluation of the decision alternatives. Spiraling involves zooming in on the most feasible alternative with the help of the identified principles, and using the principles to test and adjust the decision before committing to it. Empirically based descriptions of these processes shed light on the way managers can cope with complex decisions under time pressure while guarding against cognitive biases. Besides the processes of IBE and spiraling, the main guiding principles used by the CEOs, and three thinking-related traits shared by the effective CEOs—focus, motivation and self-awareness—are also described. Implications for effective decision making and further research are discussed. 3 Introduction What enables some decision makers to achieve superior performance? Why are they able to proceed quickly and effectively while others waver and make inferior decisions? As the world grows increasingly turbulent due to globalization of markets and rapid changes in technology, the ability to make high-quality decisions quickly in the face of complexity has become a central managerial issue and a fundamental dynamic capability.1 For example, should one adopt the new technology a vendor has just introduced? An opportunity to acquire a competitor has arisen—should one take it? And what about expanding into new, potentially lucrative but unfamiliar markets? For some managers, making complex decisions under time pressure seems to come more easily whereas others struggle. To understand the ability to make such decisions, much research and the popular business press have focused on the role of intuition, defined as “insight that bypasses reasoning” and commonly understood as an inexplicable “hunch” or “gut feeling” that tells a person what to do. Cognitive psychology has pointed toward heuristics, such as scripts and expert schemas, as manifestations of intuition that facilitates quick and complex decision making.2 However, not much is known about where intuitions come from and how they relate to rational analysis, the conventional hallmark of strategic decision making. Based on a study of 19 oil company CEOs 16 of whom were known as “good minds” and three as “not-so-effective thinkers”, this article examines the role of intuition and cognitive tools in effective strategic decision making and presents a model that integrates intuition and rational analysis. First I review the research on the role of intuition and cognitive heuristics in decision making as well as the literature supporting the model 4 induced from the study. The research methodology employed in the study is then explained briefly. The findings section describes the model and presents evidence about how successful executives manage complex decisions through the processes of integration by essentials, use of principles, and spiraling. The characteristics shared by the effective decision makers are also described. The paper concludes by discussing implications for practitioners and researchers. Research on the role of intuition in decision making Making complex decisions under time pressure Studies have found systematic, rational analysis insufficient to deal effectively with complexity. The overall conclusion of the research to-date is that experienced decision makers in various fields—e.g., fire fighters, chess masters, pilots, business executives— rely on intuition to supplement or at times even to substitute for rational analysis. Welldocumented stories such as Honda Motorcycle’s entry into the U.S. market, creation of Dodge Viper at Chrysler, or Ray Kroc’s purchase of the MacDonald’s brand from the MacDonald brothers, all highlight the role of intuition in making strategic decisions.3 And studies suggest that many corporate executives use more intuition than formal analysis in making decisions.4 Klein5 has described intuitive decision making as a pattern-recognition process: cues about the decision situation lead a decision maker to recognize a familiar pattern (based on prior experience) which then activates an action script, a routine way of responding that makes deliberate analysis unnecessary. Although he does not deny the value of rational analysis, Klein argues that reliance upon intuition leads to more effective 5 (faster, more accurate) decisions. In one of the few field studies on the use of intuition by senior managers, Khatri and Ng6 found that the use of intuition is positively associated with organizational performance but only in unstable environments. They also conclude that intuition is a synthetic reasoning process at play in all decisions (and not only when specifically called upon) that integrates isolated pieces of data into a total picture by accessing a subconsciously stored reservoir of cumulative experience. Despite all the attention to intuition, the source of intuitions is not well understood beyond suggesting they come from experience.7 And while generic recommendations about utilizing intuition in decision making have been made—e.g., don’t suppress your intuitions, get good feedback (on intuitive decisions), test the validity of your gut feelings, use imagery, be aware of bias8—explicit guidance to managers as to how to develop intuitions and use them to aid decision making is scant. Most researchers have concluded that decision makers combine intuition and rational analysis. Some suggest that analysis can play a supportive role by helping recognize patterns or evaluate decisions whereas others view the roles of analysis and intuition more or less equal.9 But how analysis and intuition interact in the decision making process has received little attention—yet this needs to be understood if one is to exploit the interaction for effective decisions. Some authors caution that reliance on intuition does not always result in highquality decisions and suggest that particular conditions (e.g., when problems are not well structured, or the organizational environment is unstable) are more conducive for the use of intuition than rational analysis.10 Many cognitive scientists suggest the opposite: that relying on intuitive heuristics, such as scripts and schemas, simplifies and speeds up 6 routine decisions, as these cognitive shortcuts are based on past experience, but will lead to impeding biases in novel, unstructured situations.11 The focus on biases has spawned a literature on how to avoid bias from cognitive shortcuts.12 Cognitive (or causal) mapping and assumptions analysis have been suggested as techniques for avoiding bias.13 However, constructing detailed cognitive maps or assumptions analysis prior to selecting a course of action takes time and is thus likely to hinder decision speed—exactly the outcome that the use of cognitive shortcuts is trying to avoid. Alternative cognitive tools that would facilitate decision speed, yet avoid bias, have not been explored much. My study of strategic decision making by oil company executives shed some light on the source of intuitions, the interplay between intuition and reason, and alternative cognitive tools facilitating fast decision making. The study’s findings yielded a model of strategic decision making, consisting of three parts: 1) integration by essentials (IBE), 2) principles, and 3) spiraling. Although derived inductively, the model and the literature that supports it are presented next, before the study’s evidence, to provide a guidepost to the reader. The following two sections of the literature review correspond to two of the three parts of the model: The cognitive interplay between intuition and analysis: Integration by essentials; and Integration by essentials yields guiding principles. No prior research explicitly describing the spiraling process of strategic decision making—the third part of the model—was found, although the idea of strategic decision makers being iterative, “loop-thinkers” is not new.14 The cognitive interplay between intuition and rational analysis: Integration by essentials 7 Intuition is often understood as an outcome, such as a thought produced by the subconscious integration of present observations with previously acquired knowledge. Here we are interested not merely in the outcome, however, but the process that yields the intuition and affects its quality. This process has been labeled “intuiting.” Cognitive science has shown that intuiting involves the subconscious.15 The conscious mind acquires vast amounts of knowledge, impossible to hold in focal awareness simultaneously; therefore it is stored in the subconscious memory. Intuitive processing entails both filing away (storing) knowledge in the subconscious, and retrieving the information upon recall. What gets stored in the subconscious is affected by experience; thus the understanding of intuition, as articulated by H. Ross Perot “as the ability to bring to bear on a situation everything you have seen, felt, tasted and experienced in an industry.”16 People with more experience are often perceived as having more or better intuitions.17 My study on oil industry CEOs showed, however, that experience is not the only factor affecting the quantity and quality of intuitions. (The effective and the not-soeffective thinkers participating in the study had equally long tenures in the industry.) The way knowledge is filed, and consequently, recalled, also influences the quality of intuitions and the speed of recall, and thus the overall speed and quality of decision making. And how knowledge is filed and recalled is not merely a function of experience but a matter of programming of the subconscious by the conscious mind—which can be learned equally by novices and experienced decision makers. If new knowledge gets filed randomly or without any labeling, it will be difficult to find when needed. If, on the other hand, one has a logically organized “filing system,” 8 recalling (retrieving) information is much more effective. How the conscious, rational mind integrates the newly acquired knowledge governs this subconscious, intuitive filing and retrieval process.18 When dealing with the decision scenario, the CEOs with “good minds” displayed integration of knowledge by essentials, whereas the less effective CEOs did not. Before illustrating what this means, let us briefly explain mental integration. Human cognition is based on mental integration: we cannot think or function without it. First we integrate similar existents we perceive: different tables, trees, people, firms to form concepts “table,” “tree,” “man,” “business firm”. For example, when we observe more than one item of furniture with a flat surface that is supported by legs and used to holding objects, we integrate them into a concept “table”.19 The concept table (its definition) serves as a mental file folder holding all our knowledge about tables; the concept business firm is a mental file folder for our knowledge about firms. We file information about things belonging to the same class for quick recall when we encounter a new entity or phenomenon that belongs to that class. The recalled information guides our action, for example, by telling us how to use a new table we observe, or what kind of goals to set for a new firm we founded. Mental integration occurs at increasing levels of abstraction. After integrating existents into concepts, we start integrating concepts into broader concepts, such as furniture and man-made objects.20 Eventually, we integrate concepts into principles, such as: In furniture design, form should follow function, or: Firms should differentiate their products from those of competitors. This higher level integration into more abstract concepts and principles serves the same purpose as the integration of percepts into 9 concepts: it condenses information to save mental space and allows a rapid recall of such information. How we integrate knowledge governs our mental filing system. There is no one system that everyone follows automatically, particularly at the higher levels of abstraction. To integrate by essentials, one must first identify the essence of whatever one is observing. The essence of a thing, event or issue is its most fundamental characteristic that gives rise to and makes its other characteristics possible.21 For example, man’s ability to use reason, which governs all the rest of his qualities, such as the ability to speak or to design and build furniture or to form and run a business, is his most fundamental characteristic—therefore Aristotle defined man as “a rational animal.”22 If essences are identified and knowledge is integrated into concepts and principles based on them, the subconscious (intuitive) filing and retrieval of knowledge will be fast and accurate, facilitating effective decision making. For example, the essence of a business firm is its purpose: production of goods or services for a profit. If a general manager integrates his or her knowledge based on this, he or she will quickly identify the requirements of profitable production: securing capital and other resources, trading the produced goods and services at prices that exceed costs, obtaining returns that exceed the investment, and balancing risk with return. This may sound obvious, but there is a plenty of evidence of chief executives who fail to identify the essential requirements of sustained profitable production or to apply them to their companies. The leadership of Enron is probably the most striking example of such a failure, with their “We Make Markets” (WMM) license plates as a tell-tale sign of their failure to observe reality correctly. 23 10 Integration by essentials yields guiding principles Integration of knowledge by essentials not only makes retrieving of information faster and more accurate, it also gives decision-makers an indispensable tool: guiding principles.24 Principles are the broadest integrations: based on the essences of things, they identify underlying cause-effect relationships that apply to a wide range of specific situations. Principles are generalizations induced from observations or past experience about attaining a goal. They offer guidance to decision-making in every field,25 such as agriculture (“cultivate the soil before sowing the seeds”), nutrition (“eat balanced meals consisting of the various food groups”), and competitive strategy (“differentiate your products from those of your competitors”). A CEO intent on creating value for the firm’s owners identifies a principle: “Risk should be commensurate with the firm’s resources.” When encountering a concrete choice, he or she recalls and applies the principle, and is able to reach a value-creating decision quickly: “Do not go and explore for oil in the Arctic when you do not have resources and expertise to make a significant discovery in a short enough time frame to provide a return commensurate with the risk.” People need principles because our capacity to retain knowledge in conscious awareness is limited; yet, vast knowledge is required for effective decisions. Principles condense large amounts of knowledge (such as accumulated experience on planting of crops) into a brief statement, e.g., “cultivate the soil before planting” which is easy to retain and recall when making farming decisions. It saves mental space by eliminating the need to remember what to do with different plant species in different locations and conditions, and facilitates decision making by accelerating the recall of the specific knowledge that the principle integrates.26 11 Many human choices are complex with far-reaching consequences, necessitating some kind of guidelines. Bringing to bear all relevant knowledge for achieving a goal, principles guide decision-makers through complex choices to long-term goals by helping to project the future and to choose between concrete alternatives.27 For example, the principles of nutrition help project the long-term health consequences of various nutritional choices as well as choose what to buy at the grocery store for supper. The principles of competitive strategy help project the consequences of various strategic options, and choose which strategies to implement. Without the principles of nutrition and competitive strategy, our choices are likely to lead to less than optimal health consequences or to undermine a firm’s competitive success. Principles are important decision guides used by effective decision makers, yet they have not been studied much.28 One reason for this lack of attention to principles in decision-making is the dominant view in cognitive science that decision makers are guided by their “knowledge structures” consisting heuristics, scripts, or schemas (but not of principles). Knowledge structures are mental templates or cognitive filters that individuals use to interpret their information environment.29 Over time, knowledge structures become cognitive shortcuts: they allow quick behavioral responses in familiar situations, based on a “script” developed from previous experience. For example, experienced drivers in northern climates have developed scripts for driving in icy conditions—scripts that novice drivers or those in warmer regions do not possess. Most people use cognitive shortcuts such as scripts in routine situations. The problem with such tools is that they do not work well in complex, unprecedented cases— encountered frequently in strategic decision making. Scripts and other cognitive shortcuts, 12 once formed, tend to be rather rigid and are prone to biases that can become “decision traps”.30 Effective decision makers, like the ones in this study, go beyond the more superficial integrations represented by scripts and other cognitive shortcuts and depend instead on guiding principles that are based on the identification of fundamental causeeffect relationships, and as broad generalizations are applicable to a variety of different contexts. Data and methods In contrast to research that focuses on cognitive biases of decision makers, the purpose of the study was to investigate what makes decision-making effective (beyond guarding against bias). Sixteen Chief Executive Officers who were named as effective thinkers—“good minds”—by their peers and experts and ran successful oil companies were asked to read a realistic decision scenario. I chose to focus on a single industry in order to use the same scenario with all subjects, thus controlling for industry-related factors. This allowed the focus on the decision processes themselves. In the scenario an oil company CEO was faced with three strategic alternatives: to invest in a new efficiency-enhancing production technology, to explore for oil and gas in the Arctic through a joint venture, or to acquire another oil company. The scenario was also read by three CEOs rated by their peers as “not so effective” thinkers. All chief executives were asked to think out loud as to how they would handle the scenario. (See the Appendix for a description of the research methodology.) This process and subsequent interviews pointed to interplay of intuition and rational analysis in which two processes are central: 1) integration by essentials (IBE) and 2) spiraling. Integration by essentials yields guiding principles that play an important role in rapid spiraling to decisions. 13 Findings: Integration by essentials, principles and spiraling How the “good minds” integrated by essentials The oil and gas CEOs with “good minds” demonstrated integration by essentials (whereas their less effective counterparts did not).31 When dealing with the scenario, the effective executives focused on what was essential: those factors that most fundamentally affected profitable production of oil and gas by the company. The following is a typical assessment of the option of exploring for oil and gas in the Arctic, based on identification of essentials: 32 “It’s too risky for a public company of this size to go exploring in the Arctic. It does not have the resources to make a sufficient investment to get a return large enough to justify the risk. The payback in the Arctic is too long; you would not see any production and revenue for seven to ten years. The production declines are about 20% annually in the Western Canadian sedimentary basin; the company cannot wait that long but needs to add production sooner. The market expects faster returns. And the company does not have any expertise in the Arctic—making the risk even higher.” Such an evaluation shows how the effective CEOs intuitively retrieved essentials from their subconsciously stored memory files: fundamental requirements of profitable production (e.g., adequate resources and expertise, balanced risk and return, a payback period short enough, replacing declining production, and meeting market expectations). This enabled them to analyze the Arctic option rationally, dismiss it quickly and to concentrate on others that would create value more effectively. This comment from one of the effective CEOs is representative: “We have certain skills to execute and create value 14 but we can’t bring forward dreams. Right now making money out of the Arctic is a dream. Given the problem [the CEO] is facing and the size of the company, investing in the Arctic is not going to generate returns that the shareholder would find acceptable.” In contrast, the less effective CEOs retrieved non-essential knowledge, such as previous aspirations for international expansion, or fear of committing to any option. This suggests that these CEOs had not integrated their knowledge by essentials. For example, one less effective CEO wanted to embrace the Arctic option because he found it “exciting:” he had always wanted to expand beyond Western Canada and did not pay attention to the essential problems of risk, payback and required resources. Another less effective CEO would not judge any of the three options and wanted to keep them all “open,” unwilling to commit to a decision. The third less effective CEO also did not get to the essentials in the scenario but instead described statistical analyses he would conduct on prospective properties. When intuition does not provide knowledge integrated by essentials, rational evaluation is not possible, and decision making is hampered. Instead on essential knowledge, the less effective CEOs’ retrieval process was based on vague associations and feelings. This did not help them effectively assess and make a firm decision about the option. Principles guiding the “good minds” Many principles the CEOs used in this study were described by them or were observable from their choices. Such principles tend to be mid-range, i.e., relatively concrete or narrow. The second-order finding yielded by this study was general principles into which the mid-range principles were integrated: rationality, value creation and independence (see Table 1). They are described in a descending order, starting with those most frequently 15 used (all were mentioned in most interviews). Three additional principles—justice, selfinterest and honesty—emerged in the interviews following the think-out-loud process (i.e., they were described by the CEOs but not consistently applied to the scenario). These are discussed at the end of this section. [TABLE 1 ABOUT HERE] The principle of rationality guides one to use reason (i.e., to adhere to facts by the means of observation and logic),33 as opposed to emotions, mystic revelations, or majority opinion to make decisions. The effective CEOs in the study strongly subscribed to this principle. They emphasized the focus on facts and keeping emotions in check (while recognizing their importance as clues or “red flags”) when making decisions. In the words of one CEO: “This business has the highest highs and the lowest lows and if you are not excited about what you do and a little bit emotional, it is a tougher business. But at the same time you have just got to pull back and say: What are the facts, Jack?” The CEOs kept asking questions to get facts and to integrate them with their existing knowledge, instead of relying on routine “scripts.” They also emphasized “having done your homework,” i.e., having a good grasp of the relevant facts before making a decision. The principle of rationality was also manifest in the effective CEOs’ strong desire for objectivity. They wanted outside expert opinion (from board members, consultants, investment bankers) to prevent getting blind-sided by a possible bias. For the same reason, they wanted to have teams with diverse backgrounds and opinions, and in one CEO’s words, “embraced the skeptics” within the company. These executives emphasized disciplined thinking and continuously assessed the quality of information they used. Although they made decisions quickly, they insisted on considering multiple options and 16 not latching onto the first one too soon, without substantiation by evidence. One CEO commented: “I would take that step back to make sure that these are the only options that I should be considering. In that process you will probably come up with another option.” In contrast, the less effective CEOs claimed to make decisions on impulse or without knowing reasons for them. One said: “We went to an auction recently and I bought [some equipment] on a whim to start another business. It was kind of whimsical, but to me it smelled like a doable deal.” And another one commented: “I am very much a gut person, so sometimes I don’t necessarily understand why I make the decisions I make.” While these comments reflect these CEOs’ implicit rejection of rational analysis in general, this principle did not guide their decision making with the scenario, either. For example, they did not focus on facts to the same extent, and were easily side-tracked to discuss other ideas that occurred to them during the exercise. The principle of value creation. All the CEOs were guided by the principle of value creation to produce material values. However, the effective chief executives applied a much more comprehensive set of mid-range principles than the less effective CEOs. For example, the effective CEOs immediately applied the risk-reduction principle to the new technology option by seeking to share costs with partners or suppliers. One CEO said: “The capital [required for the new technology option] is not insignificant. We would look at some mitigating strategies that would minimize the cost to us if it didn’t work. Is there any way we could share it? Bring somebody to help us out with it?” They were unwilling to take a risk not commensurate with the anticipated return and the company’s resources. They also used the principle of relative advantage, wanting the company to exploit its expertise relative to competition. In assessing the acquisition option, the CEOs applied the 17 principle that corporate strategy should add value: they would choose this option only if it added enough scale to reduce costs, or there were synergies between the two companies’ technical capabilities and/or reserves. Value creation was important to the less effective CEOs as well but more as a script than a principle. They did not apply this principle systematically to the scenario, nor had they identified a comprehensive set of mid-range principles guiding value creation. One embraced the option of going to the Arctic—without regard to the uncertainty or remoteness of payoff. Another did not consider the impact of risk on value creation at all (besides the political risk of regulated Arctic drilling). The third recognized the risk associated with Arctic exploration, but unlike the first group of CEOs he did not identify any decision principles. The principle of independence guides a person to do his own thinking instead of following others.34 The 16 CEOs demonstrated independence in many ways. They wanted to consult others but processed the information and decided on their own. One CEO said: “You have a discussion, it is open and frank, and let everybody say what they have in their mind. But ultimately it is not a democracy; I will make the decision at that point in time.” They also sought to “control their destiny” by retaining majority stakes in projects or by being the sole owners and operators. They resisted market pressures for maximizing quarterly profits, being confident in their own long-term vision. In the words of one of them: “I would refuse to jeopardize the long-term viability of the company to meet some short-term expectations by shareholders or analysts.” These CEOs wanted independent thinkers as employees and advisors, having concluded that independent observation and assessment of facts by many minds, as opposed to groupthink, would lead to better 18 decisions. One CEO said: “I would fill out my own chart with these ideas [about the different alternatives] but I would expect my team to be answering those questions themselves as individuals. And only when we had done our own thinking—and that is something that I have always done in organizations—we will get back together and we will have a free-for-all and I want everybody’s contribution.” Again, the less effective CEOs provide a contrast. They were clearly second-handed: they wanted to impress stockbrokers, survey what others thought, and go with the majority opinion. One said, craving recognition: “I keep thinking I should be taking an MBA … .I could go legitimately on the street and say I am actually a qualified CEO.” Another commented: “The first part of my decision is based on people: [their opinions from] the outside world and the internal.” He said he would poll investment bankers and analysts and take the most popular option. The third less effective CEO wanted to survey his employees and follow the majority view. The other three principles, justice, self-interest and honesty, did not come up with every CEO when discussing the scenario but arose afterwards when I queried them about their other decision principles. The principle of justice guides one to evaluate and treat other people objectively,35 traditionally understood as giving others their due (and not to be confused with the concept of “distributive justice” which is concerned about redistribution of wealth produced by people in a given society). This is critically important, given that so much of business performance depends on others’ input. This principle manifested itself in the way the CEOs dealt with others. The effective CEOs sought the best (i.e., the most talented, hard-working, independent) people and rewarded them with autonomy and generous 19 compensation. The toughest aspect of justice was treatment of those who did not live up to expectations. If honest criticism did not lead to an improvement, the CEOs terminated employees not meeting performance standards. The CEOs found dismissal decisions difficult, yet necessary and just. One commented on such a decision: “It really was stressful [but] we had to unplug [a geologist]; you can’t be afraid to do that … I think it is always best for everybody, if the relationship is not working.” These CEOs were not egalitarian: everybody was not treated equally. Those who helped create value were rewarded, others were reprimanded or dismissed. Neither was there room for playing favorites or politics: people were assessed on merit, not on connections or relationships. Many CEOs subscribed to the Golden Rule: treating others as one would like to be treated. Justice extended also into the CEOs’ assessment of themselves: they related how they held themselves accountable, admitted errors, and took and gave credit appropriately. With the less effective CEOs, justice as a principle did not come up prominently. While they recognized the importance of others to the success of their business, they were less clear about objective assessment. One of these CEOs had lost a business because “he had lost track of the quality of the people that were hired,” and those people committed serious errors. Another one admitted he did not feel he knew how to identify the right people to hire. The principle of self-interest. All the effective CEOs were driven by the principle of self-interest: they held themselves as their primary (but not as the only) values, and pursued their other values with a long-term approach. They did not run their companies from a sense of duty. Instead, they emphasized the enjoyment of or passion for their work. 20 In the words of one: “I love the business. You want to make a bunch of money through the process, so obviously that is a motivating factor but more so for myself, I love coming to work every day.” Many cited the intellectual challenge and the satisfaction from solving the problems they encountered. Making money was considered important but work also needed to offer challenge, enjoyment and purpose. The pursuit of self-interest did not consist of single-minded focus on work. Even if the CEOs “lived to work,” they had lives outside of it. They spent time with their families. Those with no children at home had other interests ranging from carpentry to community work, selected on the basis of their own values and enjoyment. The less effective CEOs were not that different with regard to expressed selfinterest. They also cited the love of the business and the challenge as their chief motivation. But unlike the effective CEOs, they had been less successful in pursuing selfinterest: they had not achieved a similar level of success with their businesses, had experienced relatively major setbacks, or had taken longer to grow their companies (which were significantly smaller than those of the effective CEOs). The principle of honesty guides one not to fake reality in order to gain a value.36 In other words, it guides against “bolstering” one’s resumé, using deceptive advertising or shipping products that do not meet the specs. All the CEOs considered it a given; when asked about ethical principles, it was usually raised first. By honesty, the effective chief executives meant remaining true to reality, not just in dealing with others but in one’s own thinking. In the words of one of them: “You have to be honest in all things, especially with yourself. And you can’t tolerate any kind of dishonesty, whether it is $5 on an expense account, or a white lie, or a ‘political’ truth. That is just intolerable for me.” This 21 view of honesty contrasts with those who suggest that a little dishonesty is necessary to get ahead in business and is to be expected.37 The effective CEOs regarded honesty as a general principle: it guided their thinking and conduct constantly. Honesty emphasizes rejection of that which is unreal—and thus helps keep one’s thinking focused on facts and thereby effective. How principles guard against cognitive biases These principles protected the effective CEOs against several cognitive biases common in decision making; I discuss a few as examples that show the pattern. The principles of rationality, value creation, independence and honesty were particularly helpful. They guarded against the anchoring bias, the mind’s tendency to give disproportionate weight to the first information it receives when contemplating a decision, such as emphasizing the favorable aspects that were presented before other details and discounting any negative information found out later. The principle of rationality counsels a decision maker to look at all relevant facts, not only those discovered first. It drove the effective CEOs to ask more questions and try to obtain more information than was initially given. The principle of value creation reminds a decision maker that value can only be created when both positive and negative considerations are factored in. The principle of independence steers one to focus on facts first hand, not just what somebody else chooses to present or omit. And the principle of honesty rules out any pretense, such as pretending that one has sufficient resources to implement a decision when one does not. Representativeness (also called reasoning by analogy) is another common cognitive bias; it causes a decision maker to falsely conclude that a decision situation is representative of situations that he has seen in the past. Often he then proceeds to apply 22 solutions that worked in the past but do not necessarily fit the facts of the current decision. But if he keeps the above principles in mind, they will again guard him against making a hasty generalization about representativeness before all the relevant facts are known and understood by himself first hand. Principles guarded their users against other common cognitive biases as well: escalating commitment, framing, overconfidence, etc.38 All these biases entail evading facts, following someone else’s conclusions blindly, or pretending that facts are other than they are. The principles of rationality, independence and honesty as well as value creation kept the effective decision makers focused on reality and steered them away from these or other biases. Interplay between intuition and rational analysis while making decisions: Spiraling The effective CEOs exhibited a common pattern of fast, effective decision making when dealing with the scenario. They retrieved knowledge integrated by essentials rapidly and intuitively, including principles that were rationally applied to the decision situation. I refer to this pattern as “spiraling”39 as it consisted of iterative passes or loops: 1) In the first pass (the first loop of the spiral), the CEOs immediately engaged with and focused on the decision scenario. Instead of methodical analysis, they took a quick overview of the scenario, grasping it as a whole—as veteran decision makers are known to do. They then zoomed in quickly on what they considered the most feasible option(s) and rejected the non-feasible ones. They were able to do so because their intuition brought up rationally classified, essential knowledge. In the case of the Arctic option, for example, the effective CEOs immediately focused on essentials, guided by one of the principles of value creation: The risk 23 taken and the company’s resources should be commensurate. They noted the high cost and risk of drilling in the Arctic and the company’s limited resources and shortage of hydrocarbon reserves, and rejected this option right away. By integrating their present observations with their previously identified essential knowledge (held as principles), they were able to make a decision quickly without ignoring any relevant information. (Guiding principles helped them focus on what was relevant.) 2) In the second pass, the effective decision makers analyzed the alternatives by applying principles to reach a potential decision. For example, they assessed the new technology option by applying the principle of competitive advantage: “A company can earn above average returns if it is able to achieve the lowest costs or differentiate its product in some dimension, valued by its customers.” They concluded they would choose the technology only if it allowed greater efficiency, or they could deter others from utilizing it by purchasing the properties where the technology was most applicable. 3) Finally, in the third pass, the CEOs tested their tentative decision: they developed additional alternatives, or combinations of alternatives, drawing from their previously integrated knowledge. Once the CEOs had identified the essence of the company’s problems and the principles for solving them, they were able to develop a hierarchy of alternatives that addressed both short-term and long-term performance of the firm. After organizing the alternatives into a hierarchy, a sound decision could be made. For example, many of the effective CEOs chose the option of acquiring another company, on the condition that they could avoid a 24 hostile deal and their stock was performing reasonably well. This option was reasonable, given the company’s resources and the expected payback. Most also opted to invest in the new technology, mostly as a secondary choice (unless the conditions were not right for an acquisition, in which case investing in the technology would be the primary choice). The most common alternative to these options was to sell the company—if the price was good. The essential criterion in deciding between the alternatives and ranking them was how much value could be created and how soon. This three-loop spiraling process was not a rigid sequence. Instead, most of the effective decision makers circled back and forth, elaborating on their thinking with each pass and iteratively “refining” their decision. Although they zoomed in on the most feasible alternative(s) in the first overview pass, they did not abandon the other alternatives until at the end. Rather, they “carried” these tentatively rejected alternatives along while spiraling, used them as a foil, and continued to clarify why they had initially rejected them and chosen the others. This refining led the decision makers sometimes to “rescue” an originally rejected alternative by modifying it or adding conditions or assumptions, and to adopt it as a complement to their first choice. Commented one CEO: “[What] you may also have to do is to take a look and make sure that these aren’t mutually exclusive options … Is there merit in making any combinations, and can you actually strengthen the option by doing a “this and that” vs. “this or that?” Alternatively, the iterations confirmed their original choice. For example, after initially rejecting the new technology option as too risky with insufficient return, many CEOs said they would reconsider if they had more data on the technology’s effectiveness or if its payoff could be 25 improved. The spiraling process, through “refining,” helped the effective CEOs to integrate their recalled knowledge with the goal of making an effective decision, and allowed them to be both fast and thorough, without falling victim of cognitive biases. A generic spiraling process is summarized in Table 2. [TABLE 2 ABOUT HERE] The difference from the less effective CEOs was notable. These CEOs also recognized the scenario as familiar; however, this was merely by association, such as: “I have seen a company do something similar before.” Unlike the effective CEOs, they did not identify essential similarities or differences between the scenario and their previous experiences, and thus were unable to quickly dismiss any of the alternatives. For example, one stated that his principle was not to commit to any alternatives, but to keep all his options open as long as possible. Instead of integrating by essentials and applying principles, these CEOs brought in detailed, non-essential knowledge from their past experience, which distracted their decision making and made it less effective. 40 This was also indicated by their approach to the scenario. Instead of focusing on it, the less effective CEOs got side-tracked by discussing their own companies or a detailed analysis they would perform. They were not focused on the “facts” of the scenario. Every now and then they mentioned an essential requirement of value creation, but not systematically as the effective CEOs did. Although they did name some principles afterwards when prompted, they did not apply them to the scenario—suggesting the principles were not part of their integrated knowledge. The differences between the effective and less effective CEOs’ approaches to the decision scenario are summarized in Table 3. 26 [TABLE 3 ABOUT HERE] Common Characteristics of Effective Thinkers The study’s effective CEOs shared three inter-related characteristics relevant to effective decision making: focus, motivation and self-awareness. The most striking quality of the effective CEOs was their focus. They immediately engaged with the scenario and its “facts”, and constantly processed them, focusing on finding “right answers.” These CEOs also emphasized the importance of adhering to reality as opposed to letting emotions guide decisions. When thinking out aloud, they asked a lot of questions, for more information but also habitually, to check their assumptions and the quality of the information. In contrast, the less effective CEOs were less engaged with the scenario, discussing their own companies instead, and had to be prompted to return to the scenario. These three CEOs also asked fewer questions. Underlying the effective CEOs’ focus was their particular selfish motivation. They all loved their business and found the industry fascinating. They ran oil companies by choice, and they wanted their companies to succeed. This motivated their thinking: they wanted to solve problems and find ever better solutions. They were motivated to ask the right questions and find answers; and they were motivated to think fast, to find solutions before their competitors. In the words of one of them: “Business is like a puzzle, and every day you get to come in to figure out new parts of the puzzle …it is challenging because it makes you think; you are trying to outsmart everybody else.” Motivation did not differentiate the less effective CEOs from the effective thinkers; the primary distinguishing characteristics were their ability to focus on the scenario, as well as their self-awareness. The effective CEOs were very aware of their own decision- 27 making approach. None had trouble thinking out aloud about how they would handle the scenario. Many recited the steps of their decision-making approach and referred to principles they used. These CEOs were able to analyze why they were effective, although this ability varied somewhat. Some cited either experience or intuition as their source of effective thinking, whereas others elaborated on how they bolstered their thinking by defining problems correctly, visualizing alternatives, or recognizing familiar patterns to aid decision making. The three less effective CEOs were not as self-aware. One explicitly admitted: “I don’t really know how I make choices.” Another contradicted himself without realizing it, at one point claiming: “I’m a dreamer and need doers,” and moments later: “I’m the one who puts ideas into action.” The third engaged in a detailed discussion of his preferred statistical analyses instead of focusing on the scenario. Summary and Implications for Effective Thinking This research offers a glimpse into the way effective chief executives think while making decisions. Focusing on the little studied relationship between intuition and rational analysis, it revealed that in the effective CEOs’ decision making the two interact constantly in a process labeled integration by essentials—as opposed to intuition being used only some times, as suggested by much of the previous research. These CEOs had integrated their knowledge into concepts and principles (and not just into routine scripts and expert schemas) by essentials; as abstract condensations they could be applied to several concrete decision situations. The CEOs made decisions by spiraling through iterative decision loops, aided by their principles that allowed fast and effective decision 28 making without omitting any relevant information. (Principles facilitated seeing what was essential in any given situation.) In the first loop of the spiral, the CEOs zoomed in quickly on the most feasible alternatives based on their earlier integrations. They had identified fundamental requirements of value creation in their industry and thus were able to assess any alternative against that knowledge. In the second pass, the CEOs applied principles to assess the impact of the alternatives on value creation. This step enabled them to come up with a tentative decision. Finally, in the third loop of the spiral the CEOs applied the principles of value creation to develop additional alternatives, to prioritize all the alternatives and to make a final decision. Both the guiding principles (discovered by integrating their knowledge by essentials) and spiraling to decisions through iterative loops protected the effective decision makers against cognitive biases. Implications for practice: Improving effectiveness of decision making Keeping in mind that this research used a hypothetical (although realistic) decision scenario and focused on CEOs in one industry only (in order to eliminate “noise” from comparisons of decision makers), it suggests some ways in which decision makers can cultivate “good minds,” or to improve the effectiveness of their thinking:  Look for essentials. Identifying the essence (the fundamental characteristic and cause) of every fact, issue or event one encounters is the key to effective thinking. Only if essentials are correctly identified can knowledge be properly filed—which makes possible fast and accurate retrieval later on when needed. One’s subconscious will recall non-essential information if one has filed “the dream of exploring in the Arctic/operating internationally” with “the requirements of 29 running a successful oil business.” Non-essential information will not facilitate speed or effectiveness of decision making.  Identify and apply principles. When encountering a problem or a decision, one should integrate beyond the first script that comes to mind by asking oneself what principles are involved. In other words, what general guidelines govern the achievement of the goals? Value creation (and its component principles)? Independence? Honesty? Justice? Something else? By identifying principles one seeks the abstract condensation that brings to bear a wealth of knowledge about the issue(s) one is facing. Once a principle is identified, it can be applied to the concrete situation, making the decision fast and effective. The more one identifies and applies principles, the easier it becomes—and the more effective one’s decision making. One should note that principles are no magic bullets, however, and do not guarantee “perfect” decisions. Decision makers are volitional—and thus fallible— and can induce faulty principles (not backed up by facts), or fail to apply valid principles correctly. Principles are also contextual: They are formed on the basis of evidence available up to that point. When new knowledge is discovered or developed, existing principles will be qualified, or new ones will be induced.  Spiral to refine your decision. Analyzing the decision situation by essentials allows one to focus quickly on the most feasible alternative. With the help of knowledge integrated by essentials (concepts and principles), one can also generate additional alternatives, assess and rank them, revisit the original alternatives, and make a final 30 decision. Spiraling also allows checking, and re-checking of one’s assumptions before committing to a choice.  Focus your mind on facts. One should seek the facts behind problems and issues by asking a lot of questions and stay focused on the problem or decision at hand.  Introspect. Being aware of one’s own thinking process facilitates its effectiveness. It is easier to catch oneself when emotions try to take over, or when one is tempted to evade a problem. Introspection can also guide one away from dead ends and assumptions not supported by facts.  Find and follow your passion. Thinking is difficult when one is not motivated to solve a problem and to find a solution, and the opposite is true when it is done in relation to something enjoyable. Being motivated to solve problems is the first step in effective thinking. Implications for research: Focus on guiding principles in decision making Cognitive science has taught us a lot about decision making, particularly about cognitive biases and errors to which boundedly rational decision makers are prone in their attempt to speed up the decision process by using heuristics and other cognitive shortcuts. Awareness of potential biases and errors has also spawned a literature on how to guard against them. The suggested methods, such as assumptions analysis, cognitive mapping and consulting those with divergent viewpoints, are undoubtedly helpful in preventing biases from creeping into decisions. However, they also slow down decision making which is the opposite of what cognitive shortcuts try to accomplish in the first place. Another related research stream investigating ways of speeding up decision making has focused on the role of intuition. Some scholars have connected the ideas of cognitive 31 science and behavioral decision making by suggesting that intuition involves the use of heuristics or other cognitive shortcuts such as expert schemas. While simple heuristics brought up from the subconscious by intuiting may be prone to errors, more complex expert schemas developed through an accumulation of experience may be more accurate and better suited to intuitive decision making and allowing a rapid recall of effective patterns that can be used in numerous situations across an expert’s domain.41 While distinguishing simple heuristics from expert schemas is helpful in determining when the use of intuition is most appropriate, it does not shed light onto the source of intuitions or to the differences in the quality of intuitive insights between different decision makers. Not all individuals who rely on simple heuristics make errors (because their heuristics differ in quality), nor do all experts who use complex schemas make effective decisions, again because their schemas differ in quality. This paper has pointed to a promising research direction: discovering the quality differences between individual decision makers’ intuitions by examining how they integrate their knowledge into concepts and principles. The study of oil company CEOs known as “good minds” suggests that effective thinkers integrate their knowledge by essentials, that is, by identifying the most fundamental characteristics of entities and phenomena when forming concepts, or the most fundamental cause-effect relationships between entities or phenomena when forming principles. Such integration by essentials yields concepts and principles that allow rapid recall of knowledge that is applicable to the decision or problem at hand. Every time an instance of a concept or a principle is encountered, the subconscious brings up all the relevant knowledge that has been “filed” 32 under it, allowing a decision maker to make rapid decisions with all relevant knowledge bearing upon it. The aspect of this study’s findings that is likely to be the most interesting to decision makers is the formation and application of guiding principles. As the broadest integrations of knowledge, principles can be applied to a wide range of specific decision situations without taking much (mental) space in a strategic decision maker’s tool kit. While some principles will be specific to particular industries, it would be interesting to find out whether similar guiding principles could be found in other industry contexts, and whether decision makers in these industries vary in the extent they have identified such principles and apply them to their decision making. 33 Table 1. Principles used by the effective CEOs General Principles Applied to Scenario Other General Principles Rationality: Adhere to reality through observation and logic Value creation: Produce material values Independence: Do your own thinking instead of following others Justice: Self-Interest: Evaluate and treat Hold yourself as the others objectively primary value and pursue values with a long-term approach Mid-range principles - Decide based on facts vs. emotions - Do “homework”/analysis before deciding - Strive for objectivity: ● Seek outside expert opinion ● Use diverse teams (for different views) ● “Embrace skeptics” (for different views) ● Practice disciplined thinking ● Check quality of information ● Don’t rush to conclusions before the relevant evidence is in - Manage/reduce risk (risk threatens value creation): Risk should be commensurate with the company’s resources and expected return - Focus on relative advantage: what you can do better than competitors - Resources & capabilities should match strategy - Corporate strategy must add value: acquisition should yield cost savings or technical/reservoir synergies - Consult others – but decide on your own - Control your own destiny (majority stakes in projects) - Hire and seek expert advice from independent thinkers… - …But have confidence in your own vision and ability to solve problems - Hire best people and reward them - Provide honest criticism - Terminate nonperformers - The Golden Rule - Apply justice to yourself: be accountable for your actions and take deserved credit - Do not sacrifice your interests for others - Choose your career based on what you enjoy/are passionate about - Pursue profits - Adopt a long-term perspective (e.g., not profits by any means) - Have a balance in life (work vs. other values) Honesty: Do not fake reality in pursuing values - Do not cheat or pretend to try to gain values - Be honest towards yourself (no pretension) as well as to others Table 2. Spiraling to decisions PHASE OF THE SPRIRALING PROCESS DECISION MAKING ACTION AND ITS BASIS First pass: ZOOM-IN • A quick overview of the situation Second pass: PRINCIPLES • Systematic application of relevant Third pass: TESTING DECISION without systematic analysis, resulting in a dismissal of most of the potential alternatives and a choice of one (or two) • Intuitive integration of present observations with rapidly recalled, previously identified essential knowledge principles to the chosen option(s) in order to validate it and to reach a tentative decision • Explicit identification of previously formed principles as relevant to the present situation • Testing of the tentative decision against additional alternatives, or combinations of the previously rejected alternatives, to see which one holds best against “fundamental requirements of profitable production” and other relevant principles; ranking the alternatives • Knowledge integrated by essentials (such as “fundamental requirements of profitable production,” principles of value creation and competitive strategy) • Commitment to one alternative • The spiraling process (see above) A SIMPLE HYPOTHETICAL EXAMPLE: A mid-market family restaurant’s response to an entry of a new competitor in the next block • The competitor’s prices and quality are somewhat lower. Instead of lowering prices to match those of the competitor or doing nothing, our restaurant chooses to introduce higher quality ingredients and slightly higher prices. • Essential knowledge: “profitable production” requires a distinct position along the cost-quality curve • Our restaurant’s competitive advantage is based on differentiation on quality and service. Increasing both quality and prices slightly will emphasize that. • Principle: differentiation as a source of competitive advantage • Lowering prices would signal lower quality; doing nothing may make the gap between us and the new competitor appear too small. We could also buy out the new competitor, or open our own lower pricelower quality restaurant. This would increase our risk significantly, as additional capital investment would be required. Also, all our activities are geared to high quality and service; running these different restaurants would require capabilities we do not possess. • Essential knowledge: value chain activities need to be consistent with competitive advantage; risk must be commensurate with resources • Choice of emphasizing differentiation based on quality and service by higher quality ingredients and slightly higher prices Table 3. Differences between the effective and less effective CEOs’ approaches to the decision scenario The Effective CEOs • Engaging with and focusing on the “facts” of the scenario The Less Effective CEOs • Not engaging with and focusing on the scenario but diverting from it to discuss own company or tangential issues • Taking a quick overview and zooming in on what they deemed the most feasible alternative(s) • Less disciplined and focused discussion of the scenario after initial and ongoing diversions • Intuition based on knowledge integrated by essentials (connection to fundamental characteristics and causes to induce principles) • Intuition by association with familiar experiences (“scripts”) only • Identifying what was essential to the decision situation (requirements and principles of value creation) and ranking options accordingly • No systematic or comprehensive identification of what was essential to the situation and /or not adhering to it in assessing options • Spiraling to refine decision • Superficial treatment of the decision; no spiraling to refine it • Knowledge integrated into principles based on essentials (IBE) that were brought to bear quickly on a new situation to reach a decision • Knowledge held as scripts based on associations with past experience (not IBE) Not any principles to draw on in making decisions • Focusing on the “forest” and “trees” • Focusing on “trees” vs. “forest” 36 Appendix. How the study was done As the purpose of this study was not to test hypotheses but to gain more understanding of an under-researched subject (the relationship between intuition and analysis in decision making), random sampling and statistical analysis methods were not employed. Instead, theoretical sampling in one industry (allowing for the control of contextual factors) was more appropriate. Theoretical sampling entails selecting cases/subjects that will be illustrative and shed light on the phenomenon of interest—in this study, top decision makers known to be effective. Theoretical sampling follows a replication logic: each case/subject represents an experiment which is replicated with each additional case/subject, thus lending more confidence in the findings.42 I asked nine experts knowledgeable of the oil industry (oil company CEOs, investment bankers, a financial analyst and a business reporter) to name effective thinkers among successful oil company Chief Executive Officers in Calgary, home of the second largest concentration of oil company headquarters in North-America. This led to a list of 72 names, 32 of which had been nominated twice or more. I requested participation of the 32 CEOs; 16 of them agreed. To provide some contrast, I also asked nominations for “notso-effective” CEOs; only six were also nominated. To conduct a scientific experiment, ideally a control group of similar size is employed. However, since the purpose of my study was to identify similarities among effective decision makers and not to test a theory, I was content to have some contrast, which was provided by interviewing three of the less effective CEOs. Most of the interviews were conducted over 14 months during 2002 and 2003; with three interviews conducted in 2004. (The analysis and decisions of the CEOs 37 in the later interviews did not differ markedly from the others.) The world crude oil prices in 2002-2004 averaged about US$ 30 per barrel. The 16 CEOs who were nominated as effective thinkers ran (or had run) companies that ranged in size from about 1,000 to 300,000 BOE/d (barrels of oil equivalent per day), with the median of 7,000 BOE/d. Three of the companies were private. The Chief Executives had mainly technical degrees (engineering or geology); six also held MBAs. Two were women. The median oil industry experience was 24 years; the CEOs varied in age from their 40s to 60s. They all met the criterion of success: they had a track record of value creation (many were running their second or third companies, the predecessors of which had been sold for profit) and impeccable reputations in the industry. The three “not-so-effective” CEOs ran smaller companies, from 500 to 1000 BOE/d. Two were private and one public. One had an engineering degree, another a non-technical degree, and one had no post-secondary education. Their industry experience was similar to the first group, but their success was not. They had not managed to build their companies to the same size as the first group, and had experienced various setbacks. Obviously their reputations were not as good as the first group’s. To tap into the CEOs’ decision processes, I wrote a short, hypothetical decisionmaking scenario (available upon request), placed in the 2002-2003 period (without making specific reference to oil prices, although the war on terrorism and the plans to build the Alaska pipeline were mentioned). It was revised based on the comments of three knowledgeable industry observers, and ‘piloted’ with three oil company presidents to make it as realistic as possible.43 The scenario set out a decision faced by an oil company CEO about to choose between strategic options for his firm and was used in a ‘think-out- 38 aloud’ procedure in the interviews that averaged 90 minutes and were all taped and transcribed. The interviews included questions beyond the scenario, about the CEOs’ motivations, decision making principles, outside interests and backgrounds. I analyzed the interview transcripts in a number of rounds, first grouping comments together by the question, then by similarity in their content. I conducted a parallel analysis of the processes by which the CEOs handled the decision scenario. From these groups of comments and analysis of processes, patterns about using intuition and reason started to emerge. For example, the use of various mid-range principles was directly observable in the interviews. I further integrated them into a handful of general principles discussed in the report. The notion of spiraling also emerged from the CEO’s iterative pattern of analyzing the different alternatives.44 39 References 1 M. Beer, S.C. Voelpel, M. Leibold and E.B. Tekie, Strategic Management as Organizational Learning: Developing Fit and Alignment through a Disciplined Process. Long Range Planning 38, 445-464 (2005); E. Dane and M.G. Pratt, Exploring intuition and its role in managerial decision making, Academy of Management Review 32 (1): 33-54 (2007); E. Sadler-Smith and E. Shefy, The intuitive executive: Understanding and applying ‘gut feel’ in decision making, Academy of Management Executive 18 (4):76-91 (2004). 2 The definition for intuition comes from Oxford English Dictionary, Oxford, UK: Clarendon Press (1991). Intuition as “a hunch” or “a gut feeling” is discussed in C.C. Miller and R.D. Ireland, Intuition in strategic decision making: Friend of foe in the fast-paced 21st century. Academy of Management Executive 19(1):19-30 (2005) and A.M. Hayashi, When to trust your gut. Harvard Business Review 72(2): 59-65 (2001). Scripts and schemas as manifestations of intuition are suggested by J.E. Pretz, Intuition versus analysis: Strategy and experience in complex everyday problem solving. Memory & Cognition 36(3), 554-566 (2008). 3 E. Dane and M.G. Pratt, Exploring intuition and its role in managerial decision making, Academy of Management Review 32 (1): 33-54 (2007); D.J. Isenberg, How senior managers think, Harvard Business Review 62(6): 80-90 (1984); G. Klein, Sources of Power: How People Make Decisions, Cambridge, MA: MIT Press (2001); A. Langley, Between “paralysis by analysis” and “extinction by instinct.” Sloan Management Review 36 (3): 63-76 (1995). The stories of Honda Motorcycle, Dodge Viper and MacDonald’s are reported in A.M. Hayashi, When to trust your gut. Harvard Business Review 72(2): 59-65 (2001) and C.C. Miller and R.D. Ireland, Intuition in strategic decision making: Friend or foe in the fast-paced 21st century. Academy of Management Executive 19(1):19-30 (2005). 4 W.H. Agor, The Logic of Intuition: How Top Executives Make Important Decisions. In W.H. Agor (Ed.), Intuition in organizations, Sage, Newbury Park, CA, 157-170 (1990); L.A. Burke and M.K. Miller, Taking the mystery out of intuitive decision making. Academy of Management Executive 13(4): 91-99 (1999). 5 G. Klein, The Power of Intuition, New York: Doubleday (2003). 6 N. 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Ireland, Intuition in strategic decision making: Friend or foe in the fastpaced 21st century. Academy of Management Executive 19(1):19-30 (2005); S. Shapiro and M.T. Spence, Managerial intuition: A conceptual and operational framework. Business Horizons (January-February): 63-65 (1997). 11 E.g., A.Tversky and D. Kahneman, Judgment under uncertainty: Heuristics and biases, Science 185, 1124-1131 (1974). 12 J.S. Hammond, R.L. Keeney and H. Raiffa, The hidden traps in decision making, Harvard Business Review (1998); C.R. Schwenk, Management illusions and biases: Their impact on strategic decisions, Long Range Planning, 18(5), 74-80 (1985). 13 G. P. Hodgkinson, N.J. Brown, A.J. Maule, K.W. Glaister and A.D. Pearman, Breaking the Frame : An Analysis of Strategic Cognition and Decision Making under Uncertainty, Strategic Management Journal 20(10), 977-985 (1999); Hammond, Keeney and Raiffa (1998), op. cit. at Ref. 13. 14 D. Hambrick and J. Fredrickson, Are you sure you have a strategy? Academy of Management Executive 15 (4): 48-59 (2001); H. Mintzberg, The Nature of Managerial Work. Harper & Row, New York (1973); J.B. Quinn, Strategies for Change: Logical Incrementalism, Irwin, New York (1980). 15 See for example Klein (2001) and Khatri and Ng (2000), ops. cit. at Refs. 5 and 6. 16 H. Binswanger, Psycho-epistemology. Lectures delivered at the Lyceum International summer conference, San Francisco, CA, August 12-19 (1995); S.J. Reynolds, A neurocognitive model of the ethical decision-making process: Implications for study and practice, Journal of Applied Psychology 91(4),737-748 (2006). Ross Perot was quoted in Khatri and Ng (2000) op. cit. at Ref. 6. 17 See for example Klein (2001) op. cit. at Ref. 3. 18 Binswanger (1995) op. cit. at Ref. 16. 19 A. Rand, Introduction to objectivist epistemology. New York, NY: Penguin, 11-12 (1990). 20 A. Rand, 22-23 (1990) op. cit. at Ref. 19. 21 A. Rand, 45 (1990) op. cit. at Ref. 19; H.S. Harung, More effective decisions through synergy of objective and subjective approaches. Management Decision 31(7):38-45 (1993). 22 L. Peikoff, Objectivism: The philosophy of Ayn Rand. New York: Dutton, 99-100 (1991). 23 A.T. Lawrence, The collapse of Enron. In Hitt, M.A.; Ireland, R.D. and Hoskisson, R.E. (eds.): Strategic management: Competitiveness and globalization—Cases. Mason, OH: Thomson, 131132 (2005). 41 24 D. Oliver and J. Roos, Decision-making in high-velocity environments: The importance of guiding principles. Organization Studies 26 (6):889-913 (2005); E. Locke, The epistemological side of teaching management: Teaching through principles. Academy of Management Learning and Education 1, 195-205 (2002). 25 L. Peikoff, “Why should one act on principle?” Intellectual Activist, 4 (20): 2-6 (1989). 26 Peikoff (1989) op. cit. at Ref. 25. 27 Peikoff (1989) op. cit. at Ref. 25. 28 For example, T. Keelin and R. Arnold, Five habits of highly strategic thinkers. Journal of Business Strategy 23 (5): 38-42 (2002). See also Oliver and Roos (2005) and Locke (2002) ops. cit. at Ref. 24. 29 J. P. Walsh, Managerial and organizational cognition: Notes from a trip down memory lane. Organization Science 6: 280-321 (1995). 30 See Hammond, Keeney and Raiffa (1998) or Schwenk (1985) op. cit. at Ref 12. 31 Arguably, intuitive processes are not observable. M. Gladwell, Blink: The power of thinking without thinking, New York: Little, Brown & Company, 50-51 (2005) calls intuitive thinking “thin-slicing” which is not accessible even by introspection. I cannot claim to have accessed the actual intuitive processes of the CEOs in the study. However, the CEOs’ thinking out loud revealed a pattern recognition process related to information retrieval from the subconscious memory files (see Klein (2003), pp. 21-24 op. cit. at Ref 5). 32 This is a composition of the responses of the 16 effective CEOs, not a verbatim quotation from any individual. However, it is representative as most of them identified all of the issues mentioned as essential. 33 Peikoff (1991: 221) op.cit. at Ref. 22. 34 Peikoff (1991: 251) op.cit. at Ref. 22. 35 Peikoff (1991: 276) op.cit. at Ref. 22. 36 Peikoff (1991: 267) op.cit. at Ref. 22. 37 A. Carr, Is business bluffing ethical? Harvard Business Review (January/February), 1968; R. Keyes, The post-truth era: Dishonesty and deception in contemporary life. New York: St. Martin’s Press (2004). 38 See Hammond, Keeney and Raiffa (1998) or Schwenk (1985) op. cit. at Ref 12. This term was suggested to me by Jean Moroney’s course, Tackling Hard Thinking (www.thinkingdirections.com) 39 42 40 This shows that not all analogies are equally powerful (see G. Gavetti and J. Rivkin, How strategists really think: Tapping the power of analogy, Harvard Business Review 83(4):5463, (2005)). Only those analogies that are based on some fundamental, shared principle(s) provide effective guidance to action; superficial, concrete-bound analogies do not. 41 42 Dane and Pratt (2007) op. cit. at Ref. 1 R. Yin, Case study research: Design and methods.2nd edition. Thousand Oaks, CA; Sage (1994). 43 For more on using decision scenarios and protocol analysis to study decision making, see D. Isenberg, Thinking and managing: A verbal protocol analysis of managerial problem solving. Academy of Management Journal 29 (4):775-788(1986); J.B. Thomas, S.M. Clark and D.A. Gioia, Strategic sensemaking and organizational performance: Linkages among scanning, interpretation, action, and outcomes. Academy of Management Journal 36 (2): 39-27 (1993). 44 For analysis methodology, see K.M. Eisenhardt, Building theories from case study research, Academy of Management Review 14 (4): 532-550 (1989); M.B. Miles and A.M. Huberman, Qualitative data analysis, Sage, Thousand Oaks, CA (1994). 43