The last decade has seen an increased appreciation of behavioral economics and its effect on the practice of management. In a recent HBR article, Daniel Kahneman, Dan Lovallo, and Olivier Sibony outline the questions that a decision-maker needs to ask before making a strategic bet. Their approach, however, does little to reveal the biases embedded in the assumptions held by management teams and reflected in the frameworks they use. These biases arise from what Kahneman and his long-time research partner Amos Tversky call framing.

Framing defines the way we approach problems or seek to achieve objectives. Typically we address challenges in the way they are presented, thereby limiting our ability to generate options and arrive at a better decision. Compounding this is a tendency to segregate the challenge from its wider context; it becomes our exclusive focus, resulting in objectives and targets that distort behavior because they are too narrow.

One example is casting the challenge for strategy as defeating competitors — the perennial use of warfare, martial arts, and chess analogies being one expression. Such analogies are dangerous for a number of reasons:


  • Collaboration with competitors is often required.
  • Multiple competitors typically exist (not just one as is the case in the analogies described above).
  • Competition is indirect, manifested in how customers are served rather than head-to-head combat.

The result? Confusing outcome with objective: any "defeat" of competitors comes from creating superior value for customers. But most damagingly, this framing of strategy appeals to the testosterone-fueled relativism that characterizes driven people — those that rise to the top of large companies — and in so doing accentuates the economic irrationality imbued therein.

Studies show that the most competitive among us would prefer to have a low income that is higher than that of our peers than a high income (and higher standard of living) that is lower than that of our friends and associates. Such thinking makes sense biologically (increasing the chances of finding a mate) but not economically. Focusing on trying to damage a competitor increases the tolerance for self-harm — e.g. engaging in a price war or overpaying for an acquisition.

The second example of a behavior-distorting objective is marketing's preoccupation with branding. Branding appeals to our inherent egocentricity, thereby accentuating some natural inclinations, namely viewing the world as if it revolves around us or our brand and preferring talking over listening.

But focusing on an internal construct (brand) rather an external constituency (customers) reinforces the inside-out perspective that debilitates much marketing activity. Too often, propositions are based around what the company wants to offer rather than what customers genuinely need and value.

Fans of both competitive strategy and branding argue that when developed and executed rationally, such problems do not exist; and they can cite case studies supporting their point. But such case studies are not a scientific justification. They are outliers while those taking the same approach but generating average or poor performance are disregarded. And if we have learned one thing from behavioral science, it is that rationality should not be our starting premise.

In good part, support for these approaches stems from the psychological appeal they hold for those responsible for strategy and marketing. But this psychological appeal just accentuates natural inclinations — we need frameworks that mitigate rather than compound inherent biases. These will often be the ones that appeal less.

For me, both competitive advantage and brand value are best achieved indirectly through delivering superior value to customers. But then, like everyone else I am biased, which is why we need more understanding of the biases baked into the approaches we frequently use. Until then, we will continue to be blind to our own blindness, to use another expression of Kahneman's. Identifying and alleviating embedded bias will hopefully be behavioral science's next contribution to management science.