The way individuals process risk impacts their performance and consequently the business outcomes they deliver to you.
Some people see risk as a way of life while others try to avoid it at all cost. Despite the differences in disposition, the truth is that the way one evaluates risk is subjective, unique and, as science now tells us, heavily influenced by that which is not rational. Take the recent instance of the grounding of Boeing 737 Max planes. While two national government bodies – that of the US and EU – had the same information following the devastating crash in Ethiopia in March 2019, both bodies chose to react differently to the situation. One halted all 737 Max flights effective immediately, and the other chose to continue operations of the aircraft until more evidence could be uncovered.
This is because risk perception is subjective. Even for nations!
Behavioral science tells us that one’s propensity for risk is directly affected by our grasp of the information about a situation and our inherent biases. When the risk-rewards are clear and consequences known, making a choice seems fairly straightforward. But when there is a small element of doubt, some choose to go with their intuition while others end up looking for stronger evidence of danger/rewards. Add to this mix the irrational aspect of an individual and (Daniel Kahneman Thinking fast and slow) decision making grinds to a halt, or worse, goes all wrong. You can read more about the irrationality that characterizes human decision making here.
In this post, we’ll focus on the degree of influence of non-rational factors like intuition and heuristics on risk evaluation and the (almost) silver bullet solution that can help overcome the dilemma of choice. Additionally, how it can be (and is) applied to the organization and your team context.
Intuition and Heuristics: The way we calibrate risks
In a situation where you are required to evaluate risk – much like the 737 Max incident – every action becomes a choice to either exercise precautionary bias – hoping to cut your losses as much as possible – or look to gain better proof/information to decide.
Too often individuals rely on ‘intuition’ or instincts – which is basically siding with that ‘inner voice’ telling you to do or not do something.
And while this is a perfectly okay way to go, ‘judgment calls’ have severe limitations, as we will find out.
For starters, in situations where decisions need to follow a set of rules or when expertise is essential, it makes lesser sense to ‘go with the gut’. You shouldn’t be out on a slope skiing despite an avalanche warning just because the weather ‘feels alright’. In this situation, you’d be better off abiding by the rules of the activity (and the weather warnings).In other situations where objective criteria for evaluating risks are known but you lack expertise, to get the decisions, it helps to depend on ‘heuristics’. Heuristics are mental shortcuts we internalize as a result of learning and/or experiences. An example of heuristics is when you choose to go with a particular financial investment because of the experience you’ve had with comparable investments in the past.
Heuristics work because they help prioritize and structure information based on your learnings and experiences. It does this by helping you make sense of the information at hand and allowing you to adjust the risk to your appetite in a meaningful way.
Yet again, it is not a lens through which to view each and every risk-based decision. For one, it is easy to fall for the cognitive illusion that heuristics create. There is also always that chance that you are unable to retrieve instances on which to base the current one. Being aware of the cost of heuristics sure helps get a better sense of your exposure to risk, but then what does one do when neither heuristics nor intuition can be effectively relied on? What does one do in the face of doubt? How does one effectively embrace the risk without being irrational about it?
Nowhere else is this feeling of doubt and confusion more apparent than in an organization today.
It is not uncommon to see employees, especially, feeling frazzled when faced with decisions on their jobs (Think of a sales rep and her or his daily tasks). This happens mostly because of
- the complexity of the situation (My market conditions have changed from last month)
- lack of clarity on how to make a business-positive decision (My team lead asks me to do A but the Marketing team has asked me to do B)
Without sufficient heuristics and judgment to rely on, there is a lot of room for doubt, confusion, and even excessive ruminating, which is never good for business. Research shows that teams can lose up to 40% productivity due to poor tactical decisions being made daily by individuals.
The risk-perception in such a situation is either flight (do what’s easy for me now) or fight (Do what’s right for the business).
Think of a car salesman, behind on his monthly target, faced with the following two choices
- Go meet more potential customers (add to my sales funnel) OR
- Try and close from the present list of potentials in the sales pipeline (try to reduce my sales funnel)
This situation plays out for many Sales leaders – “Evergreening of leads in their CRM – Leads that exist for months on end but don’t ever convert.”
These are largely because of a behavioral bias where sales reps see lesser risk in keeping old leads open (which they know are not going to convert) than trying to get new leads where they will have to face the pain of going out and meeting newer customers (which is harder).
Many sales reps choose to avoid the risk of opening new leads, believing that the costs (or effort) required for new leads is more than dealing with evergreening their old leads (that they know won’t convert).
The solution to this problem – you will note – is not deploying a new CRM or a mobile-enabled SFA tool – it is a behavioral one – that needs an intervention for the individual and not for the process.
New age companies now address this challenge by focusing on the behavior of teams by helping them make better decisions based on the right factors – in a way grooming the team towards the right behaviors using ‘nudges’ to take smart risks.
Good managers ‘nudge’ their teams as a matter of habit – they know how to get their team members to perform – by balancing the feedback and the persona of the team member. This is why good managers have team members who perform well and do so sustainably.
So how can risk be used to drive performance
One of our clients – an automotive giant – wanted to improve their sales team’s performance by getting the team to focus on the right behaviors for their sales funnel. For example – getting their team to focus on existing leads in their sales pipeline was more important than hunting for new leads. The idea was to chase high potential (sometimes difficult leads), by evaluating the risks of conversion balanced against opening new ones. And do this on a regular basis.
Post-deployment of our AI engine, Mia, they found that low-performing reps kept opening new leads rather than converting old ones. The conversion of leads (won/lost) was more important than opening new ones. The engine deployed two behavioral interventions (through behavior nudges) to drive lead conversion rather than new lead opening.
- Stretch goals: enable focus on the goal of closure rather than opening new ones. Example – Asking a 60% achiever whether they’d like to aim for 65% closures this month
- Precommitment: Enabling the sales rep to commit publicly (with their peers and supervisors) to this stretch goal
A combination of these interventions drive two important behavior outcomes – reduced the risk perception of “not having enough leads” and reduced the risk perception that “if I lose a lead it is a failure”
As a consequence of these behavioral interventions, the company saw a 30% jump in follow-ups within 2 months that led to an increased sales achievement. More importantly, the sales team reported that their perception of failure in the context of risks had changed and that they were able to frame their decisions better.
Behavior change is not easy but yields considerable long-term benefits. Helping your teams manage and deal with risks, and drive the right behaviors will yield significant benefits for the team and the business. What is needed is the right form of intervention – personalized to the individual context (of performance and their persona) and aligned with the larger organizational objectives.
Behavior science offers the means to settle the dust and spot your north star.