Warren Buffett similarly highlighted the effects of the social default in his 1984 letter to Berkshire Hathawaysâs shareholders:
Most managers have very little incentive to make the intelligent-but-with-some-chance-of-looking-like-an-idiot decision. Their personal gain/loss ratio is all too obvious: if an unconventional decision works out well, they get a pat on the back and, if it works out poorly, they get a pink slip. (Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming has ever received bad press.)
Lemmings might make small changes, sure, but not the changes they need in order to make an outsize impact.
Related Quotes
To be clear, Iâm not saying financial incentives lack impact. Indeed, the evidence from economics makes clear: People do respond to incentives (even if they are not the primary source of motivation for the best people). To ignore the influence of incentives is to ignore human nature. And that leads me to a key point: The wrong incentives are not merely benign; they can be outright dangerous. If youâre trying to build a great company guided by a deeply held set of values, you simply cannot afford to have incentives that reinforce behavior incompatible with your core values, or worse, that reinforce the behavior of the wrong people and drive away the right people. Indeed, the wrong incentive system can encourage people to do the wrong things and perhaps even throw a company into crisis.
Researchers have identified a cluster of anomalies that corrupt this process and lead to suboptimal allocation decisions. Among the most pernicious âŚ
- DEFEND WHATâS YOURS. Leaders tend to be territorial about the resources they control and are typically reluctant to share money and talent with other units, even when the returns might be higher.
- THE RICH GET RICHER. The biggest units in a multibusiness company tend to get more than their fair share of capital, not because they offer better returns, but because the leaders of these businesses have more political clout.
- GOOD MONEY AFTER BAD. Executives tend to overinvest in struggling businesses in hopes of turning them around. Research shows that in most cases, returns would have been higher if the money had been invested in less troubled units.
- SHARE THE PAIN. When cash is short, executives tend to cut spending across the board rather than protect high-priority areas.
- ITâS WHO YOU KNOW. Senior leaders with strong internal networks typically win more resources than leaders who are less well connected, irrespective of the merits of the particular business case.
- HOME IS WHERE THE HEART IS. Senior executives are less likely to defund or divest a business in which they worked earlier in their career.
- PRETTY IT UP. In competing for funds, business unit leaders have an incentive to inflate the merits of their investment proposals. These distortions are often difficult for corporate-level executives to ferret out.
- MORE OF THE SAME. Funding decisions are often made relative to last yearâs budget. Every business or product line gets pretty much what it got the year before, plus or minus a few percentage points.
I was also told that a brand-new CEO shouldnât be trying to make huge acquisitions. I was âcrazy,â as one of our investment bankers put it, because the numbers would never work out and this was an impossible âsaleâ to the street.
The banker had a point. Itâs true that on paper the deal didnât make obvious sense. But I felt certain that this level of ingenuity was worth more than any of us understood or could calculate at the time. Itâs perhaps not the most responsible advice in a book like this to say that leaders should just go out there and trust their gut, because it might be interpreted as endorsing impulsivity over thoughtfulness, gambling rather than careful study. As with everything, the key is awareness, taking it all in and weighing every factorâyour own motivations, what the people you trust are saying, what careful study and analysis tell you, and then what analysis canât tell you. You carefully consider all of these factors, understanding that no two circumstances are alike, and then, if youâre in charge, it still ultimately comes down to instinct. Is this right or isnât it? Nothing is a sure thing, but you need at the very least to be willing to take big risks. You canât have big wins without them.
Although dramatized by grim humour, the KLM squirrel debacle illustrates a few potentially important things about the underlying reality of management and information. A decision with no real owner had been created because it was the outcome of a process. The process worked well, until something that hadnât been anticipated (the pet squirrel craze) showed up, and then it delivered disastrous results. There was no effective way in which information could be fed back to the people who could change the policy, so the decisions continued to get worse. And then, when something so outrageous happened that it couldnât be kept out of newspapers, there was nobody to blame.
1.4. The Social Default
Doing something different means you might underperform, but it also means you might change the game entirely. If you do what everyone else does, youâll get the same result that everyone else gets. Best practices arenât always the best. By definition theyâre average.
If you donât know enough about what youâre doing to make your own decisions, you probably should do what everyone is doing. If you want better-than-average results, though, youâll have to think clearly and thinking clearly is thinking independently. Sometimes you have to break free of the social default and do something differently from those around you. Fair warning: itâs going to get uncomfortable.