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Human Phenomena, the Basis of Corporate Decisions -1
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Summarized by durumis AI
- Kodak's failure was the result of the company not recognizing the development of digital photography and becoming bogged down in its existing film business, and this is a prime example of a wrong decision made due to human bias.
- Social scientists have proven that humans are not rational beings, and the five biases that executives often experience are status quo bias, bandwagon effect, confirmation bias, anchoring effect, and trust bias.
- These biases hinder company growth and weaken competitiveness, so companies should recognize them, maintain an objective perspective, and make decisions based on data.
Kodak, which made the first digital camera, filed for bankruptcy in 2012.
And in the same year, facebook acquired the photo-sharing platform Instagram for $1 billion.
George Eastman, the founder of Kodak, believed in the 'democratization of photography,' changing the way people take photos so that everyone can use them. While the response from customers at the time was good, the company's core revenue came from film and printed photos, not cameras, and Kodak stuck to a razor-and-blade business model, selling products cheaply to sell more expensive consumables, like refills. Of course, Kodak invested in digital camera technology at the time, and understood that many people were sharing photos online. However, despite decades of opportunity, they failed to recognize that the online photo sharing phenomenon was not simply an extension of the printing business, but a new business altogether.
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The human reality, why good decisions are difficult
One of the main reasons why experienced executives within a company make wrong decisions when they want to move on to the next stage of their core business is 'human reality'. Social scientists and behavioral scientists have proven that humans are not rational and calculating machines, as assumed in microeconomics. In this regard, here are five biases that executives experience as humans that they cannot be free from:
The status quo bias
- The tendency to prefer things that stay relatively the same
We have a tendency to leave things as they arefor at least two reasons. The first is loss aversion, which is the tendency to be more concerned about the risk of loss than the prospect of gain. The second is the sunk-cost fallacy, which is the tendency to continue investing in a failing venture even if it is no longer deemed economically appropriate, because too much money has already been spent.
The bandwagon effect
- The tendency to follow the actions or beliefs of others
We believe and act the same way because many people believe and act that way. There's nothing worse than making a big strategic mistake than being the only one in the industry making that mistake. When there is a widespread conviction and enthusiasm for a particular trend in the industry, it is difficult to have the courage to disregard the industry you are in and rely on your own hunch, information, or analysis to make a different choice. This is the case when several banks on Wall Street simultaneously approved loans to people who were unable to repay their loans during the US subprime mortgage crisis.
The confirmation bias
- The tendency to filter information in a way that confirms one's preconceptions
As humans, we seek opinions and facts that support our beliefs and hypotheses. This occurs in two ways: first, selective recall, which is the habit of remembering only facts and experiences that reinforce our assumptions. Second, biased evaluation, which is the rapid acceptance of evidence that supports our hypotheses. On the other hand, contradictory evidence is subject to strict scrutiny.
The anchoring effect
- The tendency to rely too heavily on one piece of information when making a decision
We tend to rely too heavily on a few pieces of information when making decisions. For example, many fund managers advertise fund products based on their past performance. However, the statistical correlation between past performance and future performance has been proven to be negligible in many studies. In other words, it is simply an approach that raises customers' expectations of good future performance by citing good past performance.
The confidence bias
- The tendency to overestimate one's own performance
We often overestimate ourselves. In general, employees and companies overestimate their performance. Employees tend to overestimate their own contributions, and as a result, the sum of all contributions often exceeds the actual figure. Moreover, people are overly confident in their abilities. According to a survey in a related study, up to 90% of people believed that they were better drivers than the average driver.
These five representative biases make it difficult for executives within a company to maintain a fact-based perspective. And these biases lead to the following major problems:
First, they undervalue the value of investments for new growth. This is because they are already adept at identifying the risks of investment and the associated risk of failure. Second, executives strive to ignore their superiority in competition, leading them to pursue directions that do not drive competitive differentiation. Finally, executives' preconceptions, i.e., a few attractive data points and a demand for themselves to be overly accurate, make it difficult to quickly change the direction of the business when necessary.
So how can companies overcome these deeply human biases and make the right decisions? How could Kodak have seen the value of the opportunities they didn't want to see?
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