August 2008

"Open source is not exempt from the laws of gravity or economics."

Joel Spolsky

The TIM Lecture Series provides a forum that promotes the exchange of knowledge between university research and technology company executives and entrepreneurs. Readers outside the Ottawa area who are unable to attend the lectures in person are invited to view upcoming lectures in the series either through voice conferencing or webcast. 

On July 2, 2008, Steven Muegge from Carleton University delivered a presentation entitled "Theory, Evidence and the Pragmatic Manager". This section provides the key messages from the lecture. The scope of this lecture spanned several topics, including management decision making, forecasting and its limitations, the psychology of expertise, and the management of innovation.

Management Decision-Making

The first half of the lecture provided an overview of the rationale underlying management theory, surveyed findings from recent research in managerial decision making, and outlined the role that theory can play in reaching effective management decisions.

Scholars argue about the precise definition of theory, but for our purposes, we can define theory as a contingent statement of what causes what, and why. Good management theory has predictive power about things that managers care about, and it is circumstance-contingent: actions may be expected to produce different results under different categories of circumstances. Good management theory is useful for managers making sense of the present and for guiding decisions about the future. It is particularly useful when data is limited--the low information, high uncertainty environments that characterize innovation and entrepreneurship.

Whether managers realize it or not, they have mental models of cause and effect that include the deeply ingrained assumptions, generalizations, and images that influence how they understand the world and how they take action. Mental models are broad concepts that encompass many notions from cognitive psychology, including decision-making frames, scenarios, scripts, stories, images, and mental simulations. Good management theory can extend and sharpen a manager's mental models. Pragmatic managers can gain several benefits from using good management theory to help guide decisions. They can reduce the cost and time of formulating what to do, avoid making costly mistakes, and discover their own blind spots. For group decisions, theory can provide a common framework for analysis and a language for discourse that can help pinpoint disagreements and help managers understand and appreciate other perspectives. It forces precision and clarity that can focus attention, elicit new insights, and promote individual and organizational learning.

Field research in decision making finds that seasoned experts employ a variety of techniques to reach decisions. In difficult tasks, experts blend different sources of power including intuition, mental simulations of future outcomes, story-telling to make sense of the present, analogous and metaphorical reasoning, drawing on the experience of others, and formal rational analysis. Viewed in this context, theory is another tool in an expert's cognitive toolkit; it complements other tools rather than substituting for them.

There is much debate in management writing regarding decisions from the gut. We have anecdotal accounts both of spectacular successes and of costly failures. Recent research has provided new insights into the once mysterious mechanisms of intuitive decision making. We now understand intuition as a pattern matching process that occurs rapidly, below the level of consciousness. It can improve through training and practice to acquire more and better patterns. Conditions favouring an intuitive decision making approach include time pressure, ill-defined goals, dynamic conditions, and experienced participants. Effective intuition produces an adequate solution quickly. Conditions favouring an analytic approach include computational complexity (where apparent patterns are often wrong), conflict resolution between multiple participants, optimization (where there is a genuine requirement to identify the best option), the need to justify the decision to others, and inexperienced participants. Black swans are high impact, low probability events that occur outside our expectations. In technical terms, many real events are fat-tailed, complex, and fractal, and this places an upper limit on our capability to accurately forecast the future. Although black swans may appear to make sense in retrospect, they are not foreseeable as events unfold. It is not yet clear whether technological innovation is fundamentally a black swan, or whether it will become more predictable as we better understand it through further research.

Theories that are useful to economists are not necessarily good management theories as defined here. Good management theory addresses things that managers most care about. For managers, knowing about opportunities, fostering innovation, delivering value to customers, creating and appropriating value in ecosystems, and growing businesses is likely to be more useful than knowing about the market-level aggregate factors, industry averages, and equilibria that are of interest to policy makers.

There are multiple ways to make any decision and no way is perfect. Learning how to match a method to a specific context is one aspect of expertise. Further, distinguishing a good decision from a bad decision may not be obvious. Classical decision theory argued that there was an optimal utility-maximizing solution; behavioral studies attempt to describe the actual processes followed, but provide no best outcome as a benchmark. It can be argued that "following one's gut" is applying theory--the theory embedded in a manager's tacit mental models acquired through experience. In this sense, managers use theories all the time, whether they realize it or not.

Most descriptive research on intuitive decision making has thus far examined emergency workers or military officers rather than entrepreneurs. We need more cognitive task analysis research on entrepreneurs and managers.

Reflecting on black swans and uncertainty, one audience member surmised that the only thing certain about the future is that it is uncertain.

Theory and Evidence & Theory-Based Prediction

The rest of the lecture described the theory-building process, the importance of good categories, some examples of good management theories of innovation, and examples of theory-based prediction within the TIM program. It was noted that categorization is important and that superficial categories imply a lack of understanding of what is really happening. Theories improve, in part, through discovery and refinement of better categories.

Extrapolating the past may often be an adequate predictor of the near future, but when underlying circumstances change, a technology manager's experience and intuition can be unhelpful--possibly even misleading. Decision making grounded in good management theory is a possible way forward in an uncertain world.

Pragmatic managers can examine a situation through the lens of more than one theory, and gain insights from understanding the tensions and differences. They can avoid management fads by demanding evidence and cultivating a healthy scepticism towards categorical prescriptions. Theory and evidence are best treated as complements to intuition and analysis, to be employed in combination with other decision making approaches and other tactics for managing uncertainty.

Recommended Resources

Maps of Bounded Rationality: A Perspective on Intuitive Judgment and Choice

The Society for Judgment and Decision Making

The Innovator's Solution: Creating and Sustaining Successful Growth

Sources of Power: How People Make Decisions

The Power of Intuition: How to Use Your Gut Feelings to Make Better Decisions at Work

The Fifth Discipline: The Art and Practice of the Learning Organization

The Hidden Role of Chance in Life and in the Markets

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