Overcoming Overconfidence

On the surface, decision making is a simple process. Decision making begins with a stimulus, which kindles a spark deep in the unconsciousness that moves an individual into a state of decision uncertainty. The process in decision making solves that uncertainty by drawing on past experience and knowledge to decipher the code needed to break the message and solve the conundrum. The decision making process could include a situation, a problem, a challenge, an opportunity, a dilemma and weighs one potential outcome against another. (1)

This brief explains how uncertainty within decision making can result in catastrophic outcomes. To connect the dots we relate one of the largest and most infamous disasters, the Titanic, to the inner workings of the Blockbuster Chapter 11 Bankruptcy.

Barrier/Bias: Overconfidence 

Description: The tendency to be more confident in our ability to act ethically than is objectively justified by our abilities and moral character. (2)

Over the course of this article, we will show how disasters are the result of a long chain of seemingly trivial bad decisions that accumulated to reach an eventual threshold or boiling point. How prevalent are bad decisions? According to a McKinsey Quarterly survey of over 2,000 senior executives, 60% thought that bad decisions were just as frequent as good ones. (3)

How do we improve our chances that the decisions we make are the best ones? Perhaps by understanding the factors that could impact our ability to make sound decisions, we can seek to avoid them. Because this is a short article in a vast field of study, we focus on one unique pattern that is inherent to traditional decision making, overconfidence bias. This barrier in decision making is a so-called "chink in the armour" that can create a defective process capable of fatal consequences. In other words, when evaluated carefully, we see that many failures both small and large are simply the result of poor communication and teamwork. No disaster is a single event.

Titanic

The Event

More than one hundred years ago, the sinking of the RMS Titanic became one of the largest disasters of the 20th century. On the early hours of April 14th, 1912, about 400 miles south of Newfoundland, the Titanic hit an iceberg in the North Atlantic Ocean. (4) The ship was four days into its maiden voyage from Southampton, UK, to New York City, US. The catastrophe resulted in the death of over 1500 people, including the life of Captain Edward James Smith. The ship was widely considered to be "unsinkable" due to its structural design and technological advancements.

The Timeline (5)

April 14th, 10:15 am Icebergs spotted about a days time ahead of the Titanic, received via telegraph from the liner Caronia. Message given to Captain Smith.

April 14th, 11:00 am Scheduled time for the first lifeboat drill, which was cancelled by Captain Smith without explanation. Therefore, crew is unrehearsed in the event of an emergency.

April 14th, 12:00 pm Second ice warning of the day from the steamship Baltic. Reports large icebergs ahead of Titanic. Message given to Captain Smith.

April 14th, 7:20 pm Ice warnings from the SS Californian. Captain Smith does receive message; he has left the bridge to dine with passengers.

April 14th, 9:40 pm Fifth and final ice warning received from SS Mesaba. The Titanic maintains heading and speed. Conditions are moonless and calm.

April 14th, 11:40 pm Iceberg spotted 500 yards away. Thirty-seven seconds later, the Titanic has struck the iceberg on its starboard bow side.

The Cause

Who was Captain Edward James Smith? Captain Smith was very respected in the maritime community with an outstanding track record. He had more than four decades of sailing experience with only a single accident that ended without loss of life. (6) In fact, New York Times noted that Smith's "rise in rank and importance was commensurate with the safe uneventfulness of his command." (7) Therefore, it is safe to say his tenure at sea was quite impressive.

His decisions to maintain the current speed and heading, and leave the bridge at a crucial time, are all the result of overconfidence bias based on his past experience and success. Captain Smith's impressive tenure and his illusion of invulnerability at sea, skewed his ability to make ethical decisions in the best interest of everyone aboard this ship. The result was an escalation and accumulation of a series of bad decision that played a large part in the demise of the Titanic.

Now let's move the clocks forward as we relate the Titanic's demise to a current day example. While there might be differences in the command and control style of hierarchy between the time period of the Titanic and Blockbuster, it is interesting to look at the similarities between what happened on the Titanic that fateful night and what was of many factor in the demise of Blockbuster.

Blockbuster

The Event

In 2000, Netflix approached Blockbuster with an offer to merge companies. The $50 million dollar offer to aquire Netflix would evolve Blockbuster into a "click-and mortar" video-rental hybrid model. (8) When a former executive from Netflix was interviewed about the meeting he stated "Blockbuster just about laughed [us] out of their office." Today, Netflix is worth over $25 billion and in 2010 Blockbuster went bankrupt and has since been liquidated. (9)

The Timeline (10)

1985 First Blockbuster store opens in Dallas.

1994 Viacom acquires Blockbuster for $8.4 Billion.

1998 Reed Hastings founds Netflix.

1999 Viacom holds Blockbuster IPO, valued at $4.8 billion.

2000 Blockbuster and CEO John Antioco declines offer to purchase Netflix from CEO Reed Hastings for $50 million.

2002 Blockbuster posts $1.6 billion dollar loss.

2003 Netflix earns first profit, earning $6.5 million on revenues of $272 million.

2010 Drowning in revenue losses of $1.1 billion, Blockbuster plans to file for Bankruptcy. Netflix revenue is $2.16 billion.

The Cause

Blockbuster's bankruptcy in 2010 was the result of a long series of bad decisions and shortcomings. While Netflix was not the sole destructive factor, it represented a comparable iceberg in which the rejection of the offer by Netflix showed critical leaks in Blockbusters ability to forecast future trends.

Forbes wrote a detailed article analyzing the bureaucracy within a traditional economy. In the article, Forbes describes bureaucracy as a management ideology that is based upon a vertical structure in which "power trickles down from the top." (11) The article continues to show that within vertical organizations, "big leaders appoint little leaders, individuals compete for promotion, rules limit discretion, and the values are efficiency, predictability and telling people what to do." (12) The article makes a powerful conclusion by noting that choices for such incumbents within a traditional economy are fairly simple: "change or die." (13) We see here, that the command and control structure that was prevalent on the Titanic can be seen in some respects within the management style at Blockbuster.

At the time Netflix made the offer, Blockbuster was valued at approximately $4.8 billion dollars making it one of the main market leaders in terms of video rentals. The CEO at the time for Blockbuster, John Antioco, was not by any means lacking in experience or skill. John had held many successful high-level positions prior to Blockbuster including CEO at Circle K, where he engineered the company out of Chapter 11, and CEO at Taco Bell Corporation, where he reversed three years of negative sales trends. In fact, John Antioco had a very impressive resume, much the same as Captain Smith of the Titanic. Figure 1 (14) shows a detailed timeline of John Antioco's tenure at Blockbuster.

Figure 1

Figure 1

Notice the similarities between past success and future decisions in both situations? At the core of each failure, there were known conditions and factors that were insufficiently considered or perhaps overruled. It could be argued that overconfidence in action is one of the key reasons why Blockbuster no longer exists. It failed to change to accommodate current trends in the marketplace and become obsolete. Blockbuster's tools and practices were out of alignment with the needs of the modern organization. Blockbuster's mammoth size and seemingly indestructible thinking style actually created vulnerability due to overconfidence based on previous success.

Conclusion

We must challenge our decision making processes by realizing that both influence and are influenced by the way we evaluate information. Unintended decision outcomes may take a very long time to become evident, so we must be proactive in accounting for all available information before a decision is made. (15) Incorporating techniques to reduce bias into decision making can help systematically review information while also subsequently taking into account diverse opinions. By involving more people in the decision making process, we can ensure that data is being vetted from a variety of different viewpoints. In other words, reinventing our decision making to account for organizational biases can help company's learn from fewer mistakes and bad decisions.

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  1. Individual Vs. Group Decision Making. (2014). Avoid the Pitfalls. Get the Best Results. Retrieved July 20, 2015. http://www.powernoodle.com/case-studies
  2. Overconfidence Bias - Ethics Unwrapped - UT Austin. (n.d.). Retrieved July 20, 2015. http://ethicsunwrapped.utexas.edu/video/overconfidence-bias
  3. Lovallo, D., & Sibony, O. (2010, March 1). The Case for Behavioral Strategy. Retrieved July 20, 2015. http://www.mckinsey.com/insights/strategy/thecaseforbehavioralstrategy
  4. Titanic sinks. (n.d.). Retrieved July 20, 2015. http://www.history.com/this-day-in-history/titanic-sinks
  5. Titanic History | The Titanic Timeline. (n.d.). Retrieved July 20, 2015. http://www.titanicfacts.net/titanic-timeline.html
  6. Meigs, J. (2012, April 10). Why We're Still Learning the Lessons of Titanic. Retrieved July 20, 2015. http://www.popularmechanics.com/technology/infrastructure/a7442/why-were-still-learning-the-lessons-of-titanic-6705764/
  7. Ibid.
  8. Meissner, P., Wulf, T., & Sibony, O. (2015, April 1). Are you ready to decide? Retrieved July 20, 2015. http://www.mckinsey.com/insights/strategy/areyoureadytodecide
  9. Ibid.
  10. Carr, A. (2010, September 22). Blockbuster Bankruptcy: A Decade of Decline. Retrieved July 20, 2015. http://www.fastcompany.com/1690654/blockbuster-bankruptcy-decade-decline
  11. Denning, S. (2015, April 1). Do We Need Libraries? Retrieved July 20, 2015. http://www.forbes.com/sites/stevedenning/2015/04/28/do-we-need-libraries/
  12. Ibid.
  13. Ibid.
  14. Antioco, J. (2011, April 1). How I Did It: Blockbuster's Former CEO on Sparring with an Activist Shareholder. Retrieved July 20, 2015. https://hbr.org/2011/04/how-i-did-it-blockbusters-former-ceo-on-sparring-with-an-activist-shareholder/ar/1
  15. Individual Vs. Group Decision Making. (2014). Avoid the Pitfalls. Get the Best Results. Retrieved July 20, 2015. http://www.powernoodle.com/case-studies