From Max Bazerman’s “Judgement In Managerial Decision Making”
Take an Outsider’s View (from page 232)
Kahneman and Lovallo (1993) explain this apparent contradiction by theorizing that we all have two perspectives on decision making: an insider view and an outsider view. The insider is the biased decision maker who looks at each situation as unique. The outsider, on the other hand, is more capable of generalizing across situations and identifying similarities. Because these two viewpoints exist simultaneously, a member of a consulting team might be well aware that most projects take longer to complete than initial estimates suggest (outsider view) while also believing that her own optimistic estimate of an upcoming project’s duration is somehow accurate and unbiased (insider view). Similarly, people who undertake a new home construction or major home renovation know from their friends that such projects typically end up being overdue and 20–50 percent over budget (outsider view). Nevertheless, most people who initiate such a building project believe that theirs will be different—that their home will be completed on time and near the projected costs (insider view).
Kahneman identified a classic situation of insider optimism within a group of colleagues he was working with to define a new curriculum (Kahneman & Lovallo, 1993). The group estimated that the project would take 18–30 months to complete. Kahneman asked a member of the team, who was a distinguished expert in curriculum design, “We are surely not the only team to have tried to develop a curriculum where none existed before. Please try to recall as many cases as you can. Think of them as they were in a stage comparable to ours at present. How long did it take them, from that point, to complete their project?” The team member answered that 40 percent of the projects were never completed, and none were completed in less than seven years. As it turned out, the team took eight years to finish its project.
This pattern resonates well with writers. Most of us understand that books take a long time to write; nonetheless, we are optimistic about meeting our own unrealistic deadlines when we sit down to write the first chapter. We may never complete the book, but we will probably believe that the next project will be different. Similarly, Cooper, Woo, and Dunkelberg (1988) found that over 80 percent of entrepreneurs perceived their chances of success to be 70 percent or better, and one-third of them described their success as certain. In contrast, they estimated the mean success rates of businesses similar to their business to be 59 percent.
Meanwhile, the five-year survival rate for new businesses is only about 33 percent (Kahneman & Lovallo, 1993).
Kahneman and Lovallo provide convincing evidence that the outsider makes better estimates and decisions than the insider. The outsider view incorporates more relevant data from previous decisions—yet we tend to believe and act on the insider view. Why? Certainly, optimism and overconfidence are factors. In addition, Kahneman and Lovallo document the human tendency to consider all of a decision’s various details into our judgment process and, as a consequence, to view each decision as unique. This focus on the here and now
leads us to overlook historic data and to let our biases run wild. As a result, we follow the insider view despite the readily available insights of the outsider view.
The insider-outsider distinction suggests another strategy to reduce bias: When making an important decision, invite an outsider to share his or her insight. This may mean conferring with a trusted friend or colleague who has experience with similar decisions. Interestingly, when a friend is building a house, we often predict that construction will cost more and take longer than expected. Our friend is the only one who doesn’t know this! So, for decisions that really matter, ask friends you trust for their estimate of what will happen and understand that their outsider perspective may be more accurate than your biased insider view. Alternatively, ask yourself what your outsider self thinks of the situation. To assess this, imagine that the decision was a friend’s, and ask yourself what advice you would give him or her. The key is to figure out how to give the outsider a stronger voice in the decision-making process.