Why Smart People Make Bad Decisions

Hindsight is always 20/20 but lately it seems that a lot of really smart people are making really bad decisions.  I just listened to a podcast featuring Sydney Finkelstein, the author of Why Smart Executives Fail. 

I've been harping on this concept for years and could swear I wrote an article or newsletter column titled Why Smart Managers Make Dumb Decisions….but maybe I'm having just another one of those senior moments because it's no where in my files.

Regardless, Finklestein ignited a firestorm of ideas for me.  He made several relevant points for every leader to consider.

Being a successful leader isn't always about having the highest IQ, graduating from a top business school, or gaining the most experience.  It's about having the ability to make the right moves at the right time using all of the above.

What then de-rails really smart people?  Neuroscientists have no proven that our brains are genious at pattern recognition.  We build on the past to guide us in the future.  BUT…and this is BIG.  We then quickly react to these patterns based on our emotions.  While many of us become really  good at relying on our intuition (or "blink" according to Malcolm Gladwell), bad decisions will result if we don't recognize 4 red flags that make smart people stupid.

1. Experience can be misleading. When conditions change, decisions must change too.  Finklestein talks about Dick Fuld's extraordinary success at saving Lehman Brothers in the late 1990s.  Unfortunately the conditions of the current financial crisis are different and more complex than the one in which he hung gained white-knight status.  His past experience was remarkable – but inappropriate when applied to the mess we're in today.

2. Self interest – what more needs to be said! When the sense of entitlement trumps good decision making, bad decisions happens. Just think about the CEOs testifying in front of Congress – what were they thinking? To be fair, self-interest isn't always intentional.  It often works at the sub-consious level.  But isn't that what Daniel Goleman has been talking about for years – emotional intelligence.  Obviously higher EQ might have saved a few of these fallen CEO heroes.

3. Pre-judgment.  The natural tendency is to view a situation through the lens of our past experiences. We then make our decision too early and ignore changes in conditions or circumstances. He cites the response (or lack of it) by Homeland Security to Hurricane Katrina.  After the storm passed and officials observed neighborhood celebrations, they assumed the worst had past based on their experience in Florida.  But Florida didn't have an aging levy system.  Pre-judgment blinded smart people into making a very dumb decision.

4. Emotional attachment.  We are subconsiously influenced by how we feel about people, places, and things.  Take for instance Jerry Yang's refusal to accept Microsoft's bid to purchase his company.  Because of his emotional attachment to Yahoo and his personal dislike for Microsoft, he lost over $30 Billion as Yahoo shares plunged afterwards.

The podcast is good. It's worth taking a few minutes to listen to.  But when you think about it, all Finklestein is saying that EI (Emotional intelligence) once again trumps IQ and experience when critical decisions must be made.


Ira S Wolfe