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Editor’s Note: The following is an excerpt from a work in progress titled “Detecting Weak Signals.” It will be completed for the Spring issue of the Review. The authors aim to identify “methods that will help managers improve the process of surfacing, amplifying and clarifying potentially important weak signals.” Here, they address the factors that inhibit managers from spotting those signals from the start.
It’s the Question everyone wants answered: Why did so many smart people miss the signs of the collapse of the subprime market? There were many danger signals about the impending housing bubble and the rampant use of derivatives as early as 2001. Yet these signals were largely ignored by such financial players as Northern Rock, Countrywide, Bear Sterns, Lehman Brothers and Merrill Lynch until they all had to face the music harshly and abruptly. Some players were more prescient, however. In 2003, investment guru Warren Buffet foresaw that complex derivatives would multiply and mutate until “some event makes their toxicity clear.” In 2002, he derided derivatives as financial weapons of mass destruction.1
The leading question
Why do managers often overlook or misread information that should inform their judgment?
- Both individual and organizational biases inhibit the clear interpretation of information during decision making.
- “Groupthink” is particularly coercive.
- Decision makers do see signals, but jump to the most convenient conclusion about them.
So, what separates the hapless from the prescient few? Did the siren call of outsize profits and bonuses, coupled with the delusional promises of manageable risk, dull their senses? Was their ability to see sooner and more clearly compromised by the information overload, organizational filters and cognitive biases that afflict sense making in all organizations?
All managers are susceptible to the distortions and biases we saw in the credit crunch of 2008. Organizations get blindsided not so much because decision makers aren’t seeing signals, but because they jump to the most convenient or plausible conclusion, rather than fully considering other interpretations. Our own research suggests that less than 20% of global firms have sufficient capacity to spot, interpret and act on the weak signals of forthcoming threats and opportunities. Such peripheral signals are, by definition, muddied and imprecise.
Seeing them ahead of time is far more challenging than it seems in hindsight.
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1.E.L. Andrews, “Fed Shrugged as Subprime Crisis Spread,”