Jan 01 2005

Strategy Errors Made by Even the Smartest CEOs: How to Avoid them in Credit Unions

Report  
Number  
108

This report examines emerging theories of behavioral economics, and how to apply those theories to credit union practices. 

Charles Holt
Professor of Political Economy
University of Virginia
Gary Charness
Assistant Professor of Economics
University of California-Santa Barbara
Report Number 108

Executive Summary

Even the best executives are subject to making predictable errors that affect their organizations and their careers negatively. Many of these errors relate to how CEOs think about decisions in the face of substantial uncertainty.

The field of behavioral economics – a coalescence of economics and psychology – examines the biases that affect the way we make economic decisions. When these biases come into play in making strategic business decisions they can affect the outcome of a given initiative. The first step toward managing our biases is to be aware of them.

What is the research about? 

This report presents the sessions led by Holt and Charness where they challenged participants to understand the biases that come into play in making strategic decisions, and apply this knowledge to their work in credit unions. 

The presenters took the group through a number of experiments to demonstrate the power of 10 psychological components in shaping the decision process. These 10 components are psychological shortcuts that may have proved useful in our past experience, but are based upon factors other than rational thought. Environmental, cultural and other factors can easily skew decisions that ideally should be based on purely rational grounds.

What are the credit union implications?

Credit unions are in the risk management business, not the risk avoidance business. Credit unions that fear making errors are likely to be stifled in their efforts to innovate and serve. Certainty is not a common element of human endeavor. The objective is to understand and try to avoid some of the biases that are a natural part of the human condition.

Bias in strategic decision-making is an issue worth examining. Our psychological biases are an important component of the process involved in making strategic decisions, and need to be taken into account as we serve member interests.

This report is sponsored by the Center for Credit Union Research at the University of Wisconsin-Madison with the colloquium hosted by Pepperdine University.