5 Reasons Why CEOs Make Bad Decisions and How to Avoid Them
Reading Time: 5minutes
It’s time to fire my gut.
As a CEO, I have a bias for action and often make decisions with my gut.
I thought I had grown a good “gut” over the years when it comes to making decisions. In the past, when members of my team came to me with a problem or needed a decision made, I often decided even before they finished the sentence.
After I sold my last venture, I decided to write down my learnings. It was a cathartic experience and has led to the creation of this blog. In these writings, I have found significant opportunities to improve myself, both personally and professionally.
One thing I found particularly surprising was how often those gut-based decisions were wrong.
They were wrong, not because, in hindsight, I would make a better call, but because I took the wrong approach when making the decision.
About a year ago, one of my mentors suggested that I add Daniel Kahneman’s best-selling book, Thinking Fast and Slow to my reading list. It is a dense read with some of the most insightful perspectives on how we think.
That’s when I started what will surely be a long journey to developing better decision-making habits.
As a CEO, our decisions affect everything, including how we: (1) spend capital, (2) go to market, (3) build teams, (4) development product, (5) engage with customers, and (6) deal with challenges and opportunities.
I can keep going, but in my opinion, one of the best assets we can develop as a CEO is a system for making better, slower decisions.
But, why do we make bad–use your own definition of ‘bad’–decisions?
I looked back at my own career and spoke to fellow CEOs.
Here is what I believe are the most common reasons:
We trust our guts too much
Startups move at a fast pace. There are thousands of decisions being made every day in a company. That pace creates pressure to decide quickly.
“What gets in the way of clear thinking is that we have intuitive views of almost everything. So as soon as you present a problem to me, I have some ready-made answers. What gets in the way of clear thinking are those ready-made answers, and we can’t help but have them,” Kahneman explains in a fantastic podcast episode by the Knowledge Project.
As CEOs, the more experience we gain with our companies, the more those ready-made answers present themselves. Those answers come from our gut (aka System 1).
We use limited information as input
The tendency to rely too heavily upon, or “anchor,” on one trait or piece of information when making decisions (usually the first piece of information acquired on that subject) is called anchoring.
For example, we hear about a recent plane crash. It’s tragic and discussed on every news channel. Suddenly flying is unsafe. That’s a limited view of the world. Flying is quite safe and always has been. We are now anchored by this one incident.
We are anchored continuously like this in the CEO role. There is a new competitor moving in. There is a customer situation.
There is always a “shark attack.”
We are too confident
We are smart people. We are founders and CEOs. We are serial entrepreneurs.
This tends to give us the license to believe like we can master anything.
For example, have you ever felt you can run marketing better than your marketing lead? Or that you are a better salesman than your sales lead?
The truth is no one can be competent at everything. Charlie Munger and Warren Buffet have built their entire $700B (asset) business on this principle.
“You don’t have to be an expert on every company or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital,” explains Buffet in Berkshire’s 1996 shareholder letter.
In other words, you don’t have to be an expert at everything. In fact, most great CEOs are generalists. The best ones carefully lead a team of specialists.
We lack the proper visibility
When our companies are small, we know just about everything. It’s because we are probably an active member or contributor to every project or team. But, as you enter a wave of growth, things change. We add required layers of management, distributed teams, and more customers, our visibility becomes limited.
In fact, our professional managers begin to shield us from the various details of the business. After all, they believe it’s why we hired them.
Unfortunately, we begin to miss direct engagement with the broader team and miss valuable insights.
It’s these gaps that can lead to errors in judgment.
We seek consensus
As we form a management team, we feel compelled to encourage them to chime in on decisions.
Each department leader wants to have a say. Their viewpoints are based on personal experience and day-to-day exposure to the business. We often feel pressure to get this team of leaders to reach consensus.
Often times, this could be a deadly–not to mention frustrating–approach to making decisions.
‘Disagree and Commit’ is a management principle that encourages alignment and goal achievement in a company. As with many of the pioneering management principles in the IT industry, it originates backs to when Andy Grove was the CEO of Intel.
We don’t take time to reflect
We are all busy people often going from one meeting to the next. Once, I took a look at my calendar, and there was literally no room to use the toilet!
In these meetings, we are inundated with people calling for our attention. It’s often coupled with an attempt to influence our thinking on pressing matters at hand.
We should do this deal, or we should enter this market, or respond to this threat from a competitor. It can be overwhelming.
And, when we’ve had it up to our necks, we just surrender to those influences.
Because we don’t take time to remove ourselves from this environment, we miss the opportunity to develop our own thoughts and viewpoints.
We don’t develop our own ideas.
So, how can you overcome these dangerous approaches to decision making?
John is a versatile CEO and serial entrepreneur who has successfully founded, scaled multiple technology companies over a 20-year career. He is currently the CEO of Soluna, a company helping to shape the future of renewable energy and computing. Before Soluna, John was the founder and CEO of FirstBest, a transformative insurance software company acquired by Guidewire Software and Theory Center, an e-commerce software company acquired by BEA Systems. Before becoming an entrepreneur, John was the lead architect for Intel’s Digital Enterprise Group.
John is on the advisory board of several software-as-a-service, data analytics, and insurtech startups. He is the Managing Editor of CEOPLAYBOOK Media LLC, an online publication full of sage advice for first-time founder CEOs. John is also a trustee of Harlem Academy, an independent school in New York.