Confidence, Risk and Decision Making

5 Feb

A sudden lack of self confidence is not uncommon in professional sports men and women and there are now highly experienced and effective sports psychologists around to help- they have achieved some exceptional results and many a professional athlete has credited psychology with either taking their career to the next level or simply saving it. So, given the effectiveness of these techniques in managing stress and building confidence in very challenging situations, is there a place for importing these techniques into business? Would it be helpful for someone in business to think like an elite athlete?

No doubt confidence is essential to the professional athlete and confidence is important in business; so far, so good, but they part company on the subject of risk. In sport, risks are well known, in some sports you may actually not come home, but its known what the risks are, the worse case scenarios, and they can be managed, more or less. Sport is known risk and it has a floor. And the upside, which is the application of confidence, talent and luck, can sometimes be, or at least seem to be, limitless. It is a good thing to have very confident sports people.

In business risk is very different. Technology, globalisation, financial interdependencies amongst others all mean that risk is very hard to know and contain. Problems occur when organisations feel they can model and predict risk (2008 is an easy example to call on) and make decisions on this basis, with confidence. Complex environments are categorised by the lack of floor to risk, no one knows quite how bad things could get but risk models can leave you thinking you have an answer. The validity of this statement can easily be checked by the number of bankers’ post 2008 who said- it had never happened before. That is a comment reminiscent of Peter Drucker’s observation that basing the future on past events is like driving a car forward looking through the rear view mirror. Confidence within a business environment needs to be of a different type because it operates in a different risk domain- if you’re feeling confident then it’s time to be cautious.

This issue of confidence in the business environment was addressed by Danny Kahneman who observed subjective self confidence is no reliable indicator of ability or expertise. In sport you get proof positive of expertise very quickly, in business you don’t or it takes a long time to find out, and I’m sure everyone has a story to support Kahneman’s observation. Decision making in business requires a grasp of context, and this should include a very strong sense and accompanying analysis over what could go wrong. Thinking about what could go wrong basically prepares you for the consequences of your decision- if this goes sour, can I\ we handle it? Taking this approach is far superior to the cognitive strain of trying to make perfect decisions-they don’t exist.

By contrast in sport, it’s not a good idea to be thinking what could go wrong (at least not most of the time) but in business it’s essential. The two domains are defined and separated by the levels of uncertainty and whether or not the risk has a known floor.

A rule of thumb- if your domain has regular cues and patterns which can be linked to reasonably consistent outcomes then a sense of control is something which could be relied upon, cautiously. If your domain contains large amounts of random noise which could lead anywhere, well, I’ll leave you with a question from Danny Kahneman “what makes him believe he is smarter than the market? Is this an illusion or skill?”

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