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Wednesday, November 04, 2009

Operating on Data vs Instinct - An Opportunity for Leaders to Out-Perform?

Until recently, most of the decisions we were called on to make were based on hunches, insight and a little bit of data ie on incomplete information. At some point, standard leadership theory suggests we have to decide that it’s good enough and go ahead with whatever decision we have at hand.

Our ability to still make good decisions even with incomplete information relies on instinct – a sense of what the right decision is that comes from inside. Often, that voice inside of us is built out of a lot of learning about the world, a lot of experience of both success and failure. Learning trains our instincts so that we can make better decisions with less information.

Historically, a leader, in the end, is a person others rely on to make the difficult decisions and set the direction for everyone. A well-honed instinct is key to being that kind of leader, and a good leader relies on and trusts that voice inside of himself.

However, data mining and the proximity of the internet to most of what we do is changing the proximity of proof to decision and perhaps the role of instinct in a leader's decision making. Now, you don't need to do a lot of research, the data is just a click away. So, what are you going to do when your hunches don't match the data that's now pouring in? The data shows, for example, that texting while driving is more dangerous than driving drunk. It doesn't feel that way, of course, but will you respect the data and stop?

It is now clear that many data-driven findings are counter-intuitive but how long it will take leaders to get their arms around this avalanche of insight. Probably longer than most of us think.

Perhaps sport can shows business leaders the way forward and the significant commercial and competitive advantages of basing decisions on more than just instinct? 

When Michael Lewis published Moneyball: The Art of Winning an Unfair Gamein 2003, it instantly became one of the most influential books about American sports in a generation. Michael Lewis, normally a financial writer, analysed how baseball’s Oakland A’s managed to consistently produce highly competitive teams despite a payroll that was a fraction of their biggest rivals.

From 1999 -2006, the A’s finished either first or second in their division, and won over 100 games in both 2001 and 2002. They won more games than any team in baseball other than the Yankees during that period, but had one of the smallest payrolls in baseball. The protagonist in Moneyball was A’s general manager Billy Beane, who looked at potential baseball players in a completely different way from other GMs.

From Lewis’ perspective, Beane was doing what any good executive should do – trying to bring rationality to a completely irrational market. Beane saw that the market for high-end free agents was over-inflated, and the rational tools (primarily baseball statistics) for properly valuing players were underutilised. Beane was able to use those tools to find outstanding players that were completely overlooked by other teams at a fraction of their market cost.

In the UK, there is one football manager who has replicated Beane’s unconventional thinking and has consistently produced winning teams for a fraction of what his rivals spend – Arsenal’s Arsene Wenger.

Arsenal has finished in the top four every year for the past decade, and under Wenger has collected three Championships, six FA Cups, and went undefeated for the 2003-2004 EPL season. He has done this while spending a small fraction of what his rivals have spent in the transfer market. If you add up all of Wenger's spending since he joined the team in 1996 and subtract his sales in the transfer market over that time, his net expenditures are £17 million – less than £2 million per year.

(For more on the Wenger approach, see - http://www.epltalk.com/arsene-wenger%E2%80%99s-moneyball-strategy/12292 )

Maybe now is the time for hard pressed leaders to re-evaluate the role of instinct in decision making as they seek to win in the new post-recession environment?