They say that a camel is a horse designed by a committee and we know that groups, despite the best of intentions, don’t always make the best decisions.
This is a key challenge for all types of businesses, not just those in financial services. I want to examine the factors that affect the way groups perform and explore how we can use this knowledge to improve the effectiveness of group decision making.
Let’s start with an introduction to crowds and groups. We’ll then go on to explore what diversity really means and how to get the most benefit from it and finally, review a range of other factors, beyond diversity, that can impact group effectiveness.
History is dominated by individual achievement of people like Da Vinci or Shakespeare. Teams or groups barely get a look-in. Even modern industrial history tends to be focused on gifted individuals like Henry Ford or Steve Jobs who ushered in whole new industries like passenger cars or smartphones.
But groups are not always bad. In fact there are many problems that are best solved by large groups of people.
In the television show “Who Wants To Be A Millionaire”, contestants have to correctly answer 20 multiple choice questions to win a million pounds. They get three “lifelines” or different ways to help them choose an answer. They can use a 50/50, to cut down the multiple choices from 4 to 2. They can “phone a friend”. Or they can “ask the audience” in the studio to vote.
It turns out that phoning a friend is helpful, but only modestly so: the odds of a friend giving the correct answer has been about 65% on average. But asking the audience is extremely effective – that random crowd of people gets the answer right over 90% of the time. But there is a catch. It’s notable that Ask the Audience works much less well after the 10th question, as the questions start getting harder. So, crowds can be smart - sometimes - these four criteria determine when a crowd can be wise. But the most important one is, of course, that at least some people in the crowd have to know something. Crowds are great at “Who Wants To be A Millionaire”, but you probably wouldn’t want a crowd to design a nuclear power plant, or set your investment asset allocation for that matter.
In today’s business world, the basic unit of problem solving is the group or team. Unlike the history of great individuals, you can’t point to one single person who built your car, or your phone, or designed the processes behind your credit card, or your pension plan. These are all highly complex systems that depend on groups of knowledgeable people working together towards a common goal.
Getting the most out of groups is clearly an issue for businesses. And diversity can play a significant role. Let’s see how.
You might think that problem solving is all about having the smartest people. Shouldn’t you just recruit an Albert Einstein-like figure? Or perhaps a whole team of Albert Einsteins? That’s a pretty common approach for many companies but in fact doesn’t lead to the outcome you might expect...
Academic studies bear this out. Here’s a study that examined the role of individual intelligence in determining group success. What this study found was the intelligence of the smartest individual in a group determined only 4% of the variance across the team performance, and even the average intelligence determined only 9% of the variance. More than 90% of the variance came from other factors. Even more interesting was that, of the studies conducted in a laboratory setting, the average intelligence of the group accounted for a little more, 14%, of the variance across group performance. But in those that took place in the field, that is, in a natural workplace setting, average intelligence accounted for only 2% of the variance and was not meaningfully different from zero.
What’s going on here? Well, a big thing is that intelligence is a lot more complex than IQ. There are other dimensions of intelligence.
One way to think about this is these different dimensions of intelligence bring different approaches to solving a problem, different “tools” in the language of some academics. It turns out that one of the big benefits of diversity is that it allows a group to explore a greater range of possible solutions. People with a similar “toolkit” tend to approach a problem in the same way.
Here’s the result of a study involving over 500 employees in a US logistics company, across a wide range of functions. The employees were asked what they thought would improve group performance and they thought that social category diversity, such as age and gender, would be more significant than information diversity – that is group members’ experience and how they think. In practice though, the opposite was true.
Here’s another example. This one comes from a study of investment clubs in the US during the 1990s. The simple performance results suggest that mixed clubs – comprising men and women, do better than single-gender clubs. But if you take a more detailed look at the data, it turns out that what matters is the amount of informational diversity in the group. One reason for the lack of a positive effect from social category diversity on its own seems to be more difficulty in making decisions, as evidenced by the negative correlation with the amount of the portfolio invested.
So, should groups be more diverse? Well, let’s look at the evidence.
The result of a study into 18 years of data on nearly 4,000 mutual funds in the US found that group size does matter: looks like three is the magic number for team size, but interestingly, diversity was often a negative, particularly for age and education. This seems counter-intuitive, and does run counter to some of the examples we saw earlier where certain types of diversity was a benefit. This starts to highlight that diversity is not a one-way street – there are potential costs to diversity. The reason seems to be related to how the group functions and how effectively that diversity is translated into better solutions.
Let’s look again at that earlier case study on the US logistics company. Remember we saw that it was informational diversity and not social category diversity that was the key ingredient. But the same study also looked at “value diversity”, that is, how people differed in goals and beliefs. Greater value diversity has a negative correlation with group performance. The takeaway: it’s critical that groups set some guidelines, norms and clear goals. You want collaboration, not creative chaos.
To sum up, the net benefits of diversity are a function of the gross benefits of the diverse ways of thinking that individuals bring to the group minus the costs of diversity.
Diversity is important, but it’s only one half of running an effective group. There are a range of other factors which can either contribute to group success, or act as barriers. The “big six” barriers are: excessive hierarchy, hidden information, power of the majority, group polarization, conflict avoidance and emotional insensitivity.
To counter excessive hierarchy, you need to be aware of the Hippo problem – where Hippo stands for the Highest Paid Person’s Opinion. In many cases, unfortunately, this is how decisions get made. Instead, it’s much better if leaders wait before stating their opinions.
Hidden information matters because there is tendency for groups to assume that talkative people know the most, which is clearly not necessarily the case. It’s important to get all the views heard, including from the naturally less talkative people.
The power of the majority is about how people tend to conform with the majority view, even if that majority view is wrong. If you think differently, you have an obligation to dissent.
Related to the power of the majority is group polarization. The more groups discuss an issue, the more they tend towards extreme positions. You need to make sure that opposing viewpoints are always considered. anda group that never has any conflict is actually an unproductive group. A certain level of disagreement is natural and, indeed, desirable. You need to separate friendship ties from the need for a robust debate.
And finally, a skill in reading others’ emotions turns out to be strongly correlated with group success. It makes the group more sensitive to unspoken issues or areas of disagreement.
Let’s look at two of these, hierarchy and conflict avoidance, in a little more detail.
One industry in which hierarchy problems became painfully apparent was commercial air travel. Korean Air was one airline that had a particularly worrisome safety record in the 1990s, with a loss rate five times the industry average.
Part of the problem here is that Korean culture is very respectful of hierarchy, but in an airplane cockpit that can lead to problems. The captain isn’t always right, but it can be very hard for more junior crew members to point that out.
In fact, studies of pilots around the world show what is known as the Power Distance Index, or how accepting people are of a more autocratic style of leadership - and Koreans are near the top. At the bottom, countries like Ireland and the Nordics are typically less accepting of such a leadership style, so my tip here: always choose the Irish pilot! But Korean Air, to their credit, fixed the hierarchy problem by adopting a very clear set of procedures known as crew resource management, and as you can see, their recent safety record had been exemplary. Let’s turn to conflict avoidance so it’s time for a quiz....
Which of these groups would you back to get a better decision? Or, to put it another way, how important is that team dinner? Well, we saw earlier in the diversity section that establishing agreement around goals, values and norms was extremely important, so if the dinner helps to do that, it’s positive. But in general, the studies say you should be wary of mixing friendship and business.
That same study that looked at the performance of US investment clubs also looked at the differences based on how the clubs were formed. It turned out that clubs formed by groups of friends did far worse than clubs formed on professional or financial ties. Why? In part because the friendship-based groups had almost no conflict. But that meant they sometimes dodged difficult discussions. A certain amount of managed conflict is actually a necessary part of good group decision making.
So you’ve seen how there are number of factors that are important to group success; diversity is a big part of that but there are other areas to be aware of and overcome in order to get a successful outcome.
Hopefully this will give you an insight into how best to help groups build more horses and fewer camels, unless of course you happen to be crossing the Sahara Desert in which case you can ignore all this and go with the camel…