A recipe for good asset management decisions – Part 5
This is the fifth in a series of posts from the AWA’s Asset Management Specialist Network. Read part one, part two, part three and part four.
Imagine if you received your water bill from your utility with, just under the total amount due, the following detailed cost breakdown:
- Water Variable Usage Charges
- Water Fixed Access Charges
- Sub-Optimal Asset Management Decision Charges
Part five: Understanding cognitive biases
If you torture the data long enough, it will confess anything. R. Coase.
In addition to incentives, asset management decision makers are subject to all sort of irrational cognitive biases that have been hard wired in our brains by evolution. They mainly act at a subconscious level.
In theory, decision makers should base their judgment on the objective evaluation of the different available options. In real life, decision makers often do the exact opposite: their intuitive judgment influences the evaluation of the options. In other words, intuition drives decision and rationality drives justification.
Intuition is a powerful pattern recognition tool. But like any tool, it’s useful for certain applications and not so useful for others (try to hit a nail with a laptop!).
Intuition is a good decision adviser when three conditions are present:
- the decision maker has a solid experience at making the type of decision involved;
- there is a good correlation between the decision and the outcomes (i.e. limited randomness); and
- there is a quick feedback loop between the decision and the results.
These conditions are not often present for asset management decisions.
Often influenced by intuitive judgments, business cases generally tend to be more confirmatory than exploratory. They can be developed with a strong bias to support and justify a judgment that has already been made intuitively.
The list of biases is too long to be addressed here, but some of the most frequent cases include:
- Confirmation bias: When the person or team recommending a decision falls in love with their recommendation, searching mainly for supporting information and emphasising it while neglecting or discarding information that doesn’t support their preferred case.
- Sunk cost bias: Attachment to a past decision or/and to honouring resources already spent, refusing to admit an error and reconsider the options despite accumulating evidence that switching to another option would be preferable from now on. Making decision is always about the future. Past costs are irrelevant.
- Consistency bias: Informal commitment made by a manager or a team before having all the necessary information for an informed decision, pushing them to become biased advocates of one of the options to remain consistent with their early commitment or position taken.
- Authority bias: When a person of influence (e.g. the boss) expresses his or her preference for a solution before the assessment of all the options has been undertaken, leading the team to be strongly biased when developing the business case. Making the boss happy at the expense of Bill.
- Conformity bias: Promoting a project mainly because 'other utilities do it'.
- Risk aversion bias: It can take the form of over specification, over prevention, over maintenance, anticipated renewals, or overreaction to an incident. Typical causes may include decision maker’s personality, lack of understanding of the risks and costs involved, and ineffective or non-existent risk assessment processes. Risk aversion is a luxury that Bill can’t really afford.
- Halo effect: When critical thinking is turned off if a recommendation comes from a 'hot' manager or team.
- Groupthink bias: When people avoid raising necessary controversial issues or alternative solutions to prioritise group cohesion and harmony over decision quality.
- Habits: Automatically doing things a certain way simply because it is how they've always been done, failing to consider other available options that could provide more value.
- Status quo bias: Doing nothing is often the easiest option… But not necessarily the best one.
Incentive and bias-driven behaviour thrive in the dark, while transparency in decision-making processes is likely to strengthen accountability and decision quality.
Asset management decision makers should be able to understand and recognise the incentives and biases influencing their decisions. Unfortunately, just being aware of the existence of biases and incentives is not enough to neutralise their effects.
For the most important decisions, using a formal devil’s advocate role can be an effective strategy. A devil’s advocate should be a competent and independent person with critical thinking skills, and someone senior enough to ensure his or her conclusions won’t just be ignored.
This role would consist of stress testing a recommendation by reviewing and challenging the decision-making process: reviewing the objectives, analysing the potential incentives and biases at work, challenging the options considered, and reviewing the data, assumptions and the evaluation model and criteria.
This article was written on behalf of the AWA’s Asset Management Specialist Network.