sel-inspiration.com, http://self-inspiration.com/article/21-characteristics-of-a-millionaire-mindset. What causes so many companies that once dominated their industries to slide into decline? In this article, two Harvard Business School professors argue that such firms lose their touch because success breeds failure by impeding learning at both the individual and organizational levels.
Another study found that people also have trouble adjusting for the difficulty of the situation when judging successes. (See the sidebar The Challenge of Discounting Easy Successes.”) In business this bias can affect many critical decisions, including whom to hire or promote, which products to launch, and which practices to spread throughout the organization. Someone who has led a thriving business in a highly profitable industry, for instance, often appears more attractive than a similarly skilled or even more qualified candidate who has struggled to lead a firm in an industry in which most companies are failing.
The inability of people to adjust for degree of difficulty when assessing accomplishments was clearly demonstrated in a study that one of us, Francesca Gino, conducted with Don Moore of Berkeley and Sam Swift and Zachariah Sharek of Carnegie Mellon. Students at a U.S. university assumed the role of admissions officers for an MBA program and were presented with information about candidates’ grade point averages as well as the average GPA at their colleges. In their decisions, the participants overweighted applicants’ nominal GPAs and underweighted the effect of the grading norms at different schools. In other words, they didn’t take into account the ease with which grades were earned.
We repeatedly observed pharmaceutical companies making these kinds of attribution errors in choosing which drugs to kill or push forward. They selected drugs whose initial tests were successful as potential winners and allocated more money to them for further testing and development. But often managers assumed a success was due to the unique abilities of their in-house scientists and didn’t consider whether it could be due to greater general knowledge in that particular scientific area, which competitors might have, too.
In addition, we found that long lead times can blind executives to problems with their current strategies. Again, consider the pharmaceutical industry. Because it takes 12 years, on average, to get a drug from discovery to market, a company’s performance today has relatively little to do with its most recent actions and decisions. Yet both managers and investors often attribute today’s high performance to the company’s current strategy, management, and scientists.
In another study, similar feelings of confidence experienced by a team leader caused the leader to do most of the talking during the team discussion and, as a result, to fail to discover critical information that other team members had.
Overconfidence inspired by past successes can infect whole organizations, causing them to dismiss new innovations, dips in customer satisfaction, and increases in quality problems, and to make overly risky moves. Consider all the companies that grew rapidly through acquisitions only to stumble badly after biting off one too many; the countless banks that made ever-riskier loans in the past decade, sure of their ability to sort good borrowers from bad; and all the darlings of the business media that had winning formulas but did not try to update or alter their strategies until it was way too late.
In a recent study we conducted in a controlled laboratory setting, students from U.S. universities were asked to work on two decision-making problems. Learning from experience on the first problem could help them perform well on the second. After submitting their solutions to the first problem, the participants were told whether or not they had succeeded. They were then given time to reflect before starting the second problem. Compared with the people who failed at the first problem, those who succeeded spent significantly less time reflecting on the strategies they’d used. This had a cost: Those who succeeded on the first task were more likely to fail on the second. They had neglected to ask why.
To avoid the success-breeds-failure trap, you need to understand how experience shapes learning. Learning is, of course, a highly complex cognitive and organizational process, and numerous models have been developed about it in the academic literature. Drawing from those, we present a simplified model that highlights the effect that success and failure have on learning.
We start with the premise that individuals and organizations at any point in time hold certain theories, models, principles, and rules of thumb that guide their actions. Your choices about the people you hire, the projects you fund (or terminate), the features you include in new product designs, and the business strategies you pursue are all influenced by them. Sometimes theories are quite sophisticated and rooted in science or decades of practical experience. But in many other cases, they are pretty informal—and we may not even be aware that they are swaying our decisions.