No More Bad Decisions by Sydney Finkelstein

Author:Sydney Finkelstein [Sydney Finkelstein]
Language: eng
Format: epub
ISBN: 9781936529148
Publisher: New Word City, LLC
Published: 2014-01-23T00:00:00+00:00

“Don’t’ confuse me with the facts.”

In sharp contrast, everyone is familiar with the third red flag of poor decision-making: prejudgment. And to outsiders, it’s painfully obvious when someone decides that this is what he or she is going to do and sticks to that decision, no matter what facts come to light or how the situation changes.

We all make prejudgments. We stick with them even when contradictory facts start to pile up; we deny them, suppress them, or shoot the messenger who brings them. We come up with excuses and rationalizations to reinforce the decision. You might think that smart people would see their error, but I have found that the smarter we are, the better we are at finding ways to justify our prejudgments.

And as you have noticed, these mechanisms for emotional decision-making can reinforce each other. An Wang’s verdict on the personal computer can be traced to his experience with IBM, but it was also a prejudgment that he stuck with nearly to the end. When Hurricane Katrina hit New Orleans, the head of the operations section of the Department of Homeland Security, relied on his experience of recent hurricanes in Florida to make the prejudgment that this one would be no different. Later, he testified to Congress that early in the storm, he watched a report on CNN that showed people partying in the French Quarter and rejoicing that they had dodged a bullet. That image was vivid enough to justify him in ignoring literally dozens of reports that the storm was a catastrophe.

A similarly fixed idea had Kenneth D. Lewis in its grip during the climactic weekend of the financial meltdown. Bear, Stearns had already collapsed, swallowed up in a fire sale to JPMorgan Chase. The wolves were baying after Lehman Brothers, and, all but unbelievably, Merrill Lynch - Wall Street’s biggest broker - was mired in trouble and looking for a savior.

To Lewis, it was a dream come true. As chairman of Bank of America, he longed to rival his mentor and predecessor, Hugh McColl, who had reshaped the banking industry. What trophy could be shinier than Merrill Lynch? Lewis had already acquired three major banks and the mortgage company Countrywide, and he thought he understood the acquisitions drill. And this combination of unconscious self-interest and misleading experience led him to a disastrous prejudgment: He would buy Merrill Lynch, come what may.

The cyclone in the financial markets and the growing pressure from Washington left only the weekend to perform hasty due diligence on Merrill’s books and put together the deal. Never mind; Lewis pushed it through his board, offering $50 billion for Merrill Lynch. Only later did it become clear that Merrill’s assets were a toxic stew of subprime mortgages, collateralized debt obligations, and credit default swaps. Ultimately, the government had to come up with $45 billion for Bank of America and another $98 billion in guarantees; within a year, Lewis was history.

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