Rory Sutherland: When gains outweigh losses

x Sponsored content on Research Live and in Impact magazine is editorially independent.
Find out more about advertising and sponsorship.

Daniel Kahneman, in Thinking, fast and slow, recalls presenting to the board of directors of a large Fortune 500 company. Going around the table, he asks the 10 heads of the company’s separate divisions the same question: “Would you take a decision where, 50% of the time, you would increase your division’s revenue and profits by 50%, but with the risk that 30% of the time your revenues and profits would fall by 30%?”

All but two of them would have declined these odds, even though they represented an expected gain. When asked why, they candidly explained that such a decision would mean that 30% of the time they would lose their jobs.

Sitting aghast at the end of the table is the chief executive. “But I’d want all of you to take those bets, simply because – on aggregate – the gains would easily outweigh the losses.”

To which they might have replied: “Yes, it would almost certainly be a great result for you, but terminal for three of us.”

There are lessons here about the problem of defensive decision-making in business. Quite simply, most business people are facing vastly more downside risk than upside opportunity. Hence, it’s hardly irrational for them to spend far more time dodging blame than chasing sensational success. The consequences of these two outcomes are often highly asymmetrical.

Defensive decision-making is encapsulated in the famous phrase “Nobody ever got fired for buying IBM.” It must also be one of the greatest obstacles to the true value of customer research. The most valuable contribution to business made by research – which is undoubtedly its role uncovering unexpected and counterintuitive truths about human behaviour – must too often take a backseat to slavishly following a literal interpretation of what consumers say to allow the person commissioning it to defend an already safe decision.

As consumers are already predisposed to state an over-logical case for whatever it is they want, should this already over-rationalised point of view be further magnified by the client’s urge to safely take everything at face value, we see a compounding bias at work.

But there’s another lesson from Kahneman’s finding, which brings us to the field of systems thinking. Quite simply, in any complex system (a business, say) it is not safe to assume that the effectiveness of the whole can be optimised simply by optimising its separate parts. This brings us to the question of scale. There is an appropriate scale at which many problems can be solved, and this scale is not necessarily the same scale at which the problem presents itself. Yet, it is fiendishly difficult in a defensive culture to propose solving a problem by anything other than direct intervention, as it is more important to be seen to be tackling the problem than to truly solve it.

A great deal of pointless busyness is created by this urge to seem productive as an individual, rather than contributing to the productivity of the whole. Someone who is always busy feels as though they are operating at maximum efficiency. Yet, from the point of view of a system, one person’s busyness is another person’s bottleneck. If a document has to be processed sequentially by four of these eternally busy people, the item may take five or six days to traverse the bureaucracy, while, with a little slack in the system, it could be done in a day. W Edwards Deming, the great guru of Japanese manufacturing of the post-war era, spotted this: “In any system,” he argued, “there is an optimal level of slack, and it is never zero.” Yet a defensive actor regards evidence of slack as a failing.

Incidentally, when debating the virtues and demerits of flexible working, it strikes me that the entire question is asked at the wrong scale: “Will my own employees be more productive if they are allowed to work remotely?” But there’s an altogether different question, which is: “What are the prospects for our business if more of our customers are allowed to work remotely?”

The consumer economy might well benefit significantly from having vastly more discretionary income kicking around once people no longer have to commute or spend a fortune living close to their place of work. The gains we obtain through making our customers richer may easily outweigh any losses in the productivity of office work. If this seems completely mad, bear in mind that Henry Ford spotted this same thing around 100 years ago, when he introduced the two-day weekend for his staff. He did it not out of altruism, but simply because a two-day weekend made it worthwhile to own a car.

Rory Sutherland is vice-chair of Ogilvy UK

This column was first published in the October 2021 issue of Impact.