• November 21, 2014

Good Research on Bad Business Decisions

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Audencia Nantes

Why Profitable Companies Repeat Unprofitable Decisions

Using a business game with 578 participants, marketing professor Emmanuel Dion of Audencia Nantes School of Management tested the following theory: poor business decisions are often repeated because it is easier – or feels safer – to repeat what may have contributed to a positive result in the past rather than risk a decision change.

These “stowaway” decisions may be most prevalent in profitable companies, Dion believes. Though business results are not always necessarily associated with the decisions that led to them, it is generally assumed they have some meaningful influence. In larger companies, some managers may even have a reputational or career stake in having decisions be repeated.

The idea of involving students in his study inspired Dion as a teacher as well as a researcher. Too often, teaching and research are completely separate activities for university professors, he says. If students instead are directly involved with research, it helps them to understand its real value and better appreciate the work their business-school teachers do.

While theories of business decision making are abundant, there is relatively little empirical evidence to back them up, as empirical testing of real-life business decision making is necessarily very challenging.

For 20 years, Dion had been conducting business games at Audencia. He realized that business games could act as a simulation tool to test theories of business decision making. Dion relied on evidence that business students make good surrogates for business decision makers. He was also influenced by his continuing-education students. They told him the business game decision-making process is a close simulation of the actual decision-making processes they follow in their workplaces —group discussions identify areas of disagreement, a path forward is identified and, ultimately, a decision is reached.

X Factor
In his business-game experiment, Dion introduced a new budget item in which players could invest their resources. Dion called it the “X factor”. The effect of the X factor on the overall business may be difficult to measure, the student groups were told. In fact, the X factor was designed to have no positive effect whatsoever on the company’s performance; it was merely a useless cost.

Despite their inability to associate X-factor expenditure with any profitable outcome, many of the business game groups decided to allocate money to the X factor. Students tended to keep investing in the X factor without really questioning it in depth, and they kept doing so right up until the game ended.

“My experiment showed that, even in a very controlled environment like a business simulation, irrational decisions can be made,” says Dion. “A business game is not the same as reality. But if you played this game with top decision makers, it would not change the results very much.”

Stowaway decisions are likely where the return on investment from a decision is long-term, general, and difficult to prove, says Dion. Sponsorship for sports events and repeated public relations campaigns are likely candidates for stowaway decision making.

“These become territory for political decisions by people who try to internally sell their own actions, but it is not proven that they are right,” says Dion.

 

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