Max Bazerman on preventing the next financial crisis, behavioral ethics, and becoming good decision makers

February 2018. GrowthPolicy’s Devjani Roy interviewed Max Bazerman, Jesse Isidor Straus Professor of Business Administration at Harvard Business School, Co-Director of the Center for Public Leadership at Harvard Kennedy School, and Faculty Co-Chair of the Behavioral Insights Group at the Harvard Kennedy School, on preventing the next financial crisis, behavioral ethics, and becoming good decision makers. | Click here for more interviews like this one.

Links: Max Bazerman’s faculty page at Harvard Business School | His faculty page at Harvard Kennedy School | His latest book, The Power of Noticing: What the Best Leaders See (Simon & Schuster, 2014)

For questions about this interview, contact Devjani Roy.

Growthpolicy.org. What should we do about income inequality?

Max Bazerman: Elect a new President.  We are increasing income inequality under new legislation.

Growthpolicy.org. How do we prevent the next financial crisis?

Max Bazerman: Change our monitors to eliminate corruption. We currently give “independent” auditors and security rating agencies incentives to be as non-independent and biased as possible. Congress has been bought by these industries, and as a result, our watchdogs continue to fail to bark.

Growthpolicy.org. Daniel Kahneman and you have written about the final-offer arbitration challenge: a negotiation strategy for reaching fair agreements efficiently, even when dealing with seemingly unreasonable opponents. We know that final-offer arbitration originated in the 1960s within the world of Major League Baseball salary disputes and that, more recently, the insurance giant AIG has successfully tested this strategy. Do you see applications for final-offer arbitration in other areas, such as in the world of policy legislation or politics, where adversarial negotiations occur frequently?

Max Bazerman: Final-offer arbitration was created decades ago in the labor-management context by Carl Stevens. Baseball was a later adopter. Danny Kahneman and I offer it as a strategy that any party can use as a negotiation tactic that can be used by any fair party dealing with unfair opponent. The core idea of the challenge is to clarify that you believe that a third party would see the fairness of your position, and it challenges the other side to be fairer—since the unreasonable party is likely to lose if the third party has to pick the fairer offer, rather than to select a position in the middle.

Growthpolicy.org. Discussing the role of intentions and the outcome bias, you argue, “Individuals not only neglect information about procedures and decision quality when facing information about outcomes, but they also neglect information about intentions.” What are some strategies that might reduce the failure to examine intentions?

Max Bazerman: The most important strategy is to train the next generation to judge the quality of decisions, rather than results. Good decisions sometimes lead to bad outcomes.  Bad decisions sometimes lead to good outcomes. But, on average, good decisions lead to better outcomes than bad decisions. We need to better educate citizens and our students on the nature of uncertainty, and clarify problems with leaders who clarify their confusion with statements like “I reward results.”

Growthpolicy.org. Let’s talk about one of the most intriguing challenges to becoming a first-class noticer: misdirection, a strategy also applied by magicians. You observe that “intentional misdirection [where others may deliberately mislead us] is all too common in the corporate world.” Do we find instances of misdirection in social life? If so, how may one build one’s noticing skills to guard against misdirection?

Max Bazerman: This is the main topic of the last chapter of The Power of Noticing.  But, core to your specific question is learning to think more clearly about the decisions of the other side. We need to follow the actual plot, rather than the version of story being told by the story teller. When someone is presenting a PowerPoint presentation to sell you on something, ask what data you need to make a good decision, rather than simply using the data that someone else chose to put in front of you.

Growthpolicy.org. In addition to your pioneering research in negotiation theory, behavioral ethics is one of the newest fields you are closely associated with. Please share with our readers any new directions in the research on how leaders can get employees to notice unethical actions and also create organizations less susceptible to unethical behavior.

Max Bazerman: Madoff was a bad guy, as were Skilling and Lay. And, we will see more bad guys in the future. I think we know fairly little about keeping bad guys from developing.  But, for me, the interesting part of these stories, and most financial scandals, is the number of people who had access to the data, and failed to notice and act. We need to train the next generation to notice and act on the wrongdoing around us. Too few of us act on our responsibility to do so, and this allows the bad guys to continue to get away with their actions for too long.

Growthpolicy.org. Besides authoring a prolific body of academic research, you have also written two enormously popular books: The Power of Noticing (2014) and Blind Spots (with Ann Tenbrunsel, 2012). What is the next big project you are working on?

Max Bazerman: I am working on “We’re All Subjects Now” with my excellent colleague, Mike Luca. How many experiments have you been in during the last year?  We are confident that the number is over 200—when you use Google or buy at Amazon, there is often an experiment in progress on the screen that you see. The book traces the evolution of experimentation from Daniel of Judah (in the Bible) to the explosion of experiments in tech and government. We highlight the power of running true experiments, and provide guidance for managers to better understand when they should be using experimentation, and what they need to know to do so effectively.