Primeast

Statistics reveal that post-communist countries new to the EU are affected by the current economic crisis differently than the rest of Europe. These differences are themselves a sign of the instability of the young economies and could be traced to the disproportionately high ratio of foreign to local investment and to many different external factors, for example the Czech automotive industry owes its current revival to the European policy of offering cash incentives to trade old cars for new.

Feeling threatened

The most prevailing feature of the current situation in these new EU economies seems to be a sense of threat. The rarely interrupted economic growth of the last 20 years created a false sense of security, and unlike their western colleagues, managers from these new economies have limited experience of the current challenges. This in turn deepens the feelings of threat – both personal and organisational. It is therefore natural that these top executives approach the current situation as a real danger. I am afraid however, that the real “danger” in this situation lies partly within this approach.

Different Thinking

How we think about a situation will, to a great extent, pre-select the choices and solutions we can see for ourselves. This widely accepted principle has many consequences not fully appreciated by many managers responsible for devising actions and strategies for today’s difficult times.

Many top executives look for a rational solution to issues without advanced knowledge of the outcome, for example the decision whether to enter into a risky venture and how much to invest in it. Theory says that our decision should be made on the principle of highest value, ie:

probability x possible gain(loss)

This is a logical approach and it is not generally followed by ‘human’ decision makers!

Presentation is all!

Kahneman and Tversky (1984) suggested a long time ago that the psychological component of our decision making process affects our choices in a most profound way. They found that the choices for problem solving that people make are greatly influenced by the way the possible outcomes are presented.

Have a go at this example yourself, just make a note of your preferred option from each pair.

In their research, Kahneman and Tversky asked a large sample of subjects to choose between two options in the following situation:

An unusual disease is spreading through the country and health officials estimate that it will kill 600 people. Two alternative programmes are prepared with estimates for their consequences:

Programme A – 200 people will be saved Programme B – there is a 1/3 probability that all 600 people will be saved and 2/3 probability that no one will be saved.

In the choice between A or B, 72% chose A and 28% chose B.

A different but very similar group was given the same situation and asked to choose between programmes C and D.

Programme C – 400 people will die Programme D – there is a 1/3 probability that nobody will die and 2/3 probability that 600 people will die.

In the choice between C or D, 22% chose C and 78% chose D.

If people were purely logical in their decision making, the choices made should be equal for A and C and likewise for B and D as the consequences are actually the same, just presented differently!

The decision making process was not based on logic, even among these very sophisticated respondents. This lack of rationale calls for an investigation into the principles we use for our decision making - we should not expect managers to be rational in their choices, but to follow the decision making patterns we’ve seen here.

What principles are at work here?

1. Choices A and B are framed such that the death toll is inevitable. The estimate level starts with 600 lives lost, and what we are comparing are two possible GAINS measured by lives saved. The preferences of people deciding within the frame of reference of gaining is to be risk averse.
2. Choices C and D are framed from a position that no-one should die. The best outcome is the maintenance of such a state – everything less is LOSS. The preference of people deciding within a frame of reference of losing is to take risk.

What have we learned?

First of all, the language that leaders use can have a profound, if not decisive impact on how decisions are made. Secondly, assessing problems purely in terms of loss or gain can inhibit leaders abilities to make unbiased decisions – problems should be considered in terms of the whole.

Which is most productive – focusing on threats or opportunities? How should organisations approach current difficulties?

The best companies are carefully focusing on both:

• Being aware of threats is necessary to make sure enough resources are put in place to deal with the changes they could bring
• Being unaware of threats could create a climate of resistance to change and inhibit future progress
• Focusing on opportunities can stimulate a creative atmosphere where new ways of adapting to change can be achieved

Of course, there are risks:

• If we see only threats, we are more likely to pour resources into the wrong place. Threat of failure is a good motivation to try harder, but we often need to start doing things differently instead of doing more of the same that got us into trouble in the first place
• Seeing only possible gains will create a false sense of security that things will remain as good as they are now, and change is merely an optional ‘extra’

Conclusion

Approaching the current issues only as threats might lead to deeper problems for industry when the recovery starts. To be prepared for recovery, new systems and higher levels of efficiency need to be achieved, a creative approach is needed. Let’s hope that the psychological momentum created by the threat will be reworked in a creative manner into a motivation for new approaches and investments into the future effectiveness of factories and staff.

How do you focus on the opportunities that change offers?

This case study was written by Tomáš Hančil, our Principal Consultant in the Czech Republic.