Why do most supervisors dare not take risks? A Discussion of Behavioral Economics|ManualTrader

Why do most supervisors dare not take risks? A Discussion of Behavioral Economics

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Suppose you are the director of a company and your boss plans to invest in your department to increase profitability. After your calculations, you find that there are two possibilities for investment: one, a 50% chance of earning 2 million, and a 50% chance of losing 1 million. The expected return is 1 million. The scale of the company is very large, even if it loses hundreds or even tens of millions of yuan, it will not affect the company's solvency. Are you willing to challenge such an investment plan? Think about it first, we will look at him from the perspective of behavioral economics at the end.

1. The American football coach's choice for the fourth offense

I don’t know if you have ever watched American football. This sport is almost one of the most passionate and strategic sports in the world. And Bill Belichick can be said to be the most legendary coach of the NFL in recent years. He has won six Super Bowl championships for the New England Patriots team and won a total of 271 wins until the end of 2019. The head coach with the third highest number of wins in the history of the NFL.

When the American Super Cup kicks off, the TV always attracts viewers from all over the United States, and the TV commercials cost more than US$5 million in 30 seconds, which is staggering.

In the 10th week of the 2009 NFL season, the Patriots faced one of the best-performing quarterbacks in history, the Colts led by Peyton Manning. With more than 2 minutes left in the game, With the Patriots led by Belichick maintaining a six-point lead, most team coaches will choose conservative punts, but Belichick has taken an unexpected decision. He decided to attack. However, the Patriots finally failed to attack, the ball came to the Colts, and the Colts won the game with a touchdown before the end of the game.

(Note: Choosing "abandon kick" in this situation is a bit similar to NBA. With your team leading, most coaches will require possession of the ball in the fourth quarter and only a few seconds or minutes are left. Defenders, try to delay the game by dribbling the ball to gain a chance of winning. But Belichick did not use the "abandon kick" strategy that most coaches would use, instead demanding offense. Just like your basketball team is leading by 2 points, the game only With 15 seconds left, the defenders are still asked to attack quickly instead of using conservative delaying tactics.)

Criticisms from Patriots fans and major media began to flood the sea. ESPN sports analysts even stated on the show, “Belichick’s decision is almost crazy and completely unreasonable.” Belichick’s decision to subvert the convention violates tradition. We are all Agree, but is it possible that the decision is correct? To make a decision is to choose among different options. At first glance, he has only two options: abandon the kick or attack. But further analysis, he has other options, such as: running, passing or false abandon kick. And every different way of running or passing the ball represents an option, so this is not a simple decision.

Brian Burke, the founder of Advanced Football Analytics, specializes in statistical analysis of American football strategies. According to his calculations, Belichick has a relatively high offensive win rate. But the other faction retorted, "These "evidences" proved by numbers are all nonsense. You just put together a bunch of numbers. How to prevent the variables and risks in the middle? "

However, whether it is the New York Times column 4th down bot's article in 4th Down: When to Go for It and Why or David Romer's "Enterprise Pursuit of Maximization? Evidence from Professional American Football", the paper points out that coaches often make wrong decisions. , So that the fourth offense is not enough to choose the offense. Many people still think that Belichick's decision is reckless. This kind of discussion using the principle of groupthink is very problematic. You can't just say that a certain idea and practice is right because everyone agrees. Those who can separate themselves from these types of decisions are often the winners.

You can't just say that a certain idea and practice is right because everyone agrees. Those who can separate themselves from these types of decisions are often the winners.

2. The decision of the company executive

The 2017 Nobel Laureate in Economics, Richard Thaler, was invited to a print media company to take a decision-making course for the company’s executives. The company's chief executive also sat behind the conference room and listened. Thaler asked the 23 supervisors present a question, just like the question I asked at the beginning of the article: The boss plans to invest in your department to increase profitability. After your calculations, you find that there are two possibilities for investment: one, a 50% chance of earning 2 million, and a 50% chance of losing 1 million. The expected return is 1 million. The scale of the company is very large, even if it loses hundreds or even tens of millions of yuan, it will not affect the company's solvency. Are you willing to challenge such an investment plan? The result: Only three supervisors present expressed their willingness.

And Thaler told the CEO that assuming these projects are "independent," that is, the success or failure of an individual investment plan will not affect the success or failure of another one. How many projects does the CEO hope to invest in? The chief executive replied: "I want it all!" If the company invests in 23 investment projects, the expected total return is 11.5 million yuan. A little bit of mathematics shows that the overall probability of losing money is less than 5%. But in fact, the CEO can only get three investment plans.

3. Loss avoidance: change positions and brains

  Loss avoidance is a kind of cognitive bias, which means that when people face the same amount of gains and losses, people think that "losses" are more unbearable. In fact, the pain caused by loss is twice as much as the happiness brought by gain.

In the first case, why do most coaches or football critics prefer to "abandon a kick" in the same situation than to risk an "offense" that almost no one chooses? You can find that if we choose a strategy that most people will choose, if this strategy succeeds in the end, no one will remember the success of the strategy, but if you fail, people will at least not criticize the coach’s strategy, but may blame it. Because of other factors. If he rashly chooses a strategy that few people choose, even if the team wins, it will only make the average person more convinced of his indiscretion, but if he loses, he will be criticized as strongly as Belichick without understanding.

In the second case, if the investment is successful, the supervisor will receive at most a portion of the bonus. If the investment fails, in addition to the company's losses, the supervisor may face accusations from the chief executive or even be fired. Since the rewards of success are not proportional to the losses faced by failure, most executives are reluctant to use their own future as a bargaining chip. You can find that the supervisor makes bad decisions in order to avoid losses. As I said in the previous article, psychological biases can affect the quality of decision-making.

In the face of such a dilemma, as the economist Keynes said: "Wisdom in doing things teaches us that for the sake of reputation, we should rather fail by following the rules than succeed by subverting tradition." A decision by Belichick can trigger football in the media. The authority has been in conflict for weeks, but why can he make difficult decisions time and time again while most supervisors are afraid to accept the challenge? That's because no coach in the entire NFL league has as much job security as Belichick. At that time, Belichick had led the team to three Super Bowl championships in ten years, so he didn't worry about losing his job. Or discredited, he can focus on the only important thing, which is the right result. He must rely on correct judgment to optimize his decision to achieve his goal. However, the executives did not have such excellent results. In order to prevent their career from ruining their own risky investment decisions, they gave up maximizing the company's interests.

In the principal-agent model in the economic literature, the responsibility for such investment failures is usually attributed to the supervisor (agent), who failed to make decisions that maximize the company’s interests, and only acted in accordance with their own interests. The well-being of non-organizations. Although this description is correct, many times the real reason is the boss (the client), not the employee.

In order for managers to be willing to take risks, it is necessary for the company to create an environment where managers can be rewarded if they make decisions that are expected to bring the greatest value through prior evaluation, that is, based on the information available at the moment of the decision The decision was made, even if the subsequent result was a loss of money. However, hindsight bias makes it difficult to implement such a policy. As long as there is a time difference between the time of decision-making and the time of results, the boss may not remember that he himself thought it was a good idea.

in conclusion   

Traditional economics assumes that when making any decision, human beings can make a very rational choice. Later, based on observations, behavioral economists put forward a lot of evidence that most people's behavior is "irrational" (bounded rationality). Even though a large number of papers pointed out the limited rationality of human beings, traditional economics still refused to give up the doctrine of "rational economic man".

Therefore, Gary Becker, the 1992 Nobel Prize winner in economics, came up with this idea when asked about his views on economics: "Even if 90% of the people in the world are unable to perform complex analysis for calculating probability As long as another 10% of people get these jobs that must be calculated, they will also greatly reduce the effect of "bounded rationality."

But we can see that Belichick made the right decision based on rational judgment, but the result of this decision failed, but he still couldn't resist the criticism of the other 90% of irrational people. As a result, most people who have to do these probability calculations prefer to follow the crowd and decide according to the decision of the majority, just like those supervisors and other coaches.

For a supervisor, it is great to be able to manage a group of employees without letting them make mistakes. They even think that this is more important than whether to accept the boss's investment plan. At least they don't have to face the result of investment failure. So this is why having a big company or a team worth billions of dollars does not mean that you have been listed in the 10% that Baker said that knows how to calculate probability, nor does it mean that you can hire those who know how to calculate probability. People, or let them make decisions that are in the highest interest.

In a competitive labor market, we all expect Baker to be right: every player is a strong player, every stock investor can invest in the correct stock price based on calculations, and every politician is The bill can be promoted according to the interests of the general public, every supervisor can make the right choice according to the interests of the company, and everyone can be placed in a suitable job position. Ironically, as we climbed up the promotion ladder, this logic became less and less convincing. As Thaler said: All economists have at least specialization in the field they are good at, but after they are promoted to department heads, they behave quite incompetently. Just like the Peter principle said: every employee will eventually be promoted to a position they are unable to perform. ——We all need to know that we are all just irrational human beings.

Peter's Principle: Every employee will eventually be promoted to a position they are unable to perform.

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