Overcoming the HiPPO Phenomenon: Encouraging a Culture of Experimentation and Data-Driven Decision Making
Even when money is scarce, businesses should make experimentation a standard practice for driving innovation. That means adopting a new model of leadership at the managerial level, supporting employees’ innate curiosities, placing an emphasis on data rather than anecdote, allowing anyone (not just those in R&D) to conduct or commission a test, and making sure all tests are conducted ethically.
H&M is just one of many successful companies that, despite a lot of criticism in recent years, understands the need of taking risks in order to foster growth and transformation. For example, H&M has found the best digital touchpoints, design choices, discounts, and product recommendations by conducting extensive online testing. In order to maintain a competitive edge in today’s fast-paced business environment, the company has made testing a top priority.
H&M has institutionalized experimentation as part of the company culture to increase the likelihood of its success. The organization encourages employees to test anything without management approval, much like Facebook and Amazon. The business performs numerous tests all at once and has run thousands of experiments in the past years. H&M’s rise to the top of the fashion industry is largely attributable to this dedication to experimentation, a practice the company will no doubt maintain as it continues to grow.
Despite the fact that the success of those companies that have made the change should inspire others to do the same, very few organizations actually do so. In this piece, I’ll explore a phenomenon among leaders and business owners that discourage trying new things out — the HiPPO — and examine some of the potential mechanisms — heuristics and biases — that give rise to this innovation’s killer.
However, I am not arguing that all managerial decisions have to or even should be based on experimentation. In some cases, like when deciding whether or not to acquire a company, testing is extremely challenging, if not impossible. However, if all possibilities are explored, experiments can become instrumental in management decisions and spark productive debates.
HiPPO
The highest paid person’s opinion, or HiPPO, is a common business term. The term is used to describe when high-level executives and decision-makers use their personal biases and anecdotes to guide strategic business decisions rather than empirical evidence or the results of controlled experiments.
The risk-taking and experimental nature of innovation can be intimidating to the people whose decisions ultimately determine the fate of a business. As a result of HiPPO, decisions are frequently made based on subjective opinions rather than data or experimentation, which can be a major impediment to innovation. This can result in lost chances for development and creativity.
Employees in a HiPPO-driven culture may be afraid to speak up against the views of upper management for fear of retaliation. This can stifle originality and limit the productivity of the company’s employees.
Creating a culture that places a premium on experimentation and data-driven decision making can help businesses combat HiPPO and encourage innovation. They need to encourage workers at all levels to contribute to the innovation process and give them the tools and time they need to try out new ideas. Facilitating communication and cooperation between departments can lead to better ideas and faster development. Businesses can also use methods like business experimentation to collect objective data for use in reducing the impact of HiPPO on decision making.
Heuristics and Biases: Understanding and Overcoming the HiPPO Phenomenon
One of the reasons HiPPO can be so influential is the presence of heuristics and biases that can create and reinforce this dynamic. In this section, I’ll go over some of the major heuristics and biases that play a role in the HiPPO phenomenon, as well as some potential solutions.
Heuristics and Biases
When faced with a choice or a difficult task, people often turn to heuristics, which are essentially mental shortcuts. These shortcuts are based on prior experiences, intuition, and rules of thumb; as such, they are not always reliable or flawless.
Bias, or systemic errors in thinking, can cause people to reach the wrong conclusion and make poor choices. Cognitive biases, social biases, and motivational biases are only few of the numerous forms of bias that can affect a person’s decision-making. Experience, social norms, and mental shortcuts (heuristics) can all contribute to bias.
When discussing these psychological concepts, bias and heuristics are similar but not the same. Heuristics, in a nutshell, are a mental technique for making judgments, and bias is the systematic inaccuracy that might arise from utilizing heuristics or other such causes.
Leaders uses heuristics, or mental shortcuts, to speed decision-making processes and arrive at answers rapidly. On the other hand, “bias” describes a pattern of incorrect thinking that can arise for a number of reasons, including those related to one’s own mental processes, interpersonal relationships, and internal drives. Using heuristics is not the only source of bias; bias can exist even when no shortcuts are taken.
To sum up, heuristics are a type of mental strategy used in decision making, and bias is the systematic error that can arise from using heuristics or from other sources.
The Evolutionary Origins of Heuristics and Bias
It is believed that heuristics and biases are the outcome of evolutionary adaptations acquired in response to the complex and unpredictable circumstances in which humans evolved. They are the result of our brain’s limited availability to energy and have therefore played a significant role in its conservation.
The limited nature of the human brain leads many to conclude that heuristics are inevitable. Heuristics help us make quick decisions based on the most important qualities by simplifying the massive volumes of information our brains are continuously being presented with, hence reducing cognitive load.
Bias, on the other hand, is thought to result from the need to make sense of ambiguous information and to reduce uncertainty. Bias can be seen as a way for our brains to fill in gaps in our knowledge, and to create coherent narratives that make sense of our experiences.
It is worth noting that while heuristics and bias can be adaptive in some situations, they can also lead to errors and suboptimal outcomes in others. As such, it is important to be aware of the potential for bias and to take steps to mitigate its impact in decision-making processes.
Cognitive Traps in HiPPO Decision-Making for Innovation and Business Experiments
Availability
This heuristic relates to our tendency to rely on information that is quickly available in our brains, which is frequently based on recent or emotionally salient experiences. This might take the form of decision-makers at a company relying on previous experiences or stories when making judgments, rather than looking at evidence or taking into consideration opposing points of view. In the context of business experimentation, this can be problematic. For instance, a HiPPO can disregard the findings of a new trial simply because they conflict with their prior knowledge or views, even if the evidence suggests that the new strategy is more successful.
Representativeness
This heuristic refers to our tendency to rely on stereotypes or mental shortcuts while making judgments or conclusions. Even if there is little actual evidence to support it, we could conclude that something that fits our mental image of a given category is more likely to be accurate or useful. In the context of innovation, this can take the form of decision-makers presuming, without taking into account the actual evidence, that a strategy is more likely to be effective if it appears to match their mental model of a successful innovation. For instance, a HiPPO may make the assumption that a certain idea would be successful because it appears to be similar to other successful ideas that they have seen, even if there are significant variations in the context or data that suggest otherwise.
Anchoring
This heuristic refers to our tendency to trust excessively on the first piece of information we come across while making decisions or judgments, even if that information is random or irrelevant. In the context of corporate experimentation and innovation, this might take the form of decision-makers relying on original assumptions or ideas, even if subsequent data reveals that those assumptions were inaccurate or incomplete. For instance, a HiPPO could fixate on a specific concept for a product early on in the development process and then refuse to alter course, despite the fact that further experiments or data would indicate that an alternative strategy might be more beneficial.
Confirmation Bias
This bias occurs when HiPPOs exclusively look for material that supports their already thoughts or opinions. They may ignore or dismiss material that challenges their opinion. For instance, a HiPPO can be persuaded that their company’s flagship product is the best available and refuse to consider customer feedback about its weaknesses.
Status Quo Bias
This bias occurs when HiPPOs desire to retain the status quo and reject change, even when given with evidence that change could be advantageous. They may feel content with the current method of doing things and may not want to take risks. For instance, a HiPPO may be unwilling to implement a novel application because they are comfortable with the status quo and see no reason to switch.
Sunk Cost Fallacy
This bias happens when high-level decision-makers (HiPPOs) keep pouring money, time, or effort into a doomed project or initiative. They can feel trapped by the project’s sunk expenses and unable to give up, even though doing so would be in the company’s best interest. For example, a HiPPO can insist on continuing to develop a product that is not finding momentum in the market, merely because a lot of money has already been spent on its development.
Hindsight Bias
This bias happens when HiPPOs think they could have foreseen the outcome of an event or decision after the fact. Even though they have no real control over the outcome, individuals may link success or failure to their own decision-making ability. For example, a HiPPO can claim that they knew a given business decision was the right one all along, even if the decision was made based on insufficient or unclear information.
Seven steps to epiphany
The first step toward overcoming cognitive biases is to become aware of them. Organizations should educate their decision-makers, particularly HiPPOs, on cognitive bias and how it influences decision-making.
Collect varied perspectives. To avoid the availability and representativeness heuristic, organizations should seek out diverse perspectives and ideas. HiPPOs should be encouraged to take into account evidence and input from those who may hold alternative points of view.
Promote experimentation (the main point of this article). In order to prevent the anchoring bias, companies should encourage experimentation as well as the exploration of alternative strategies. If fresh information indicates that the HiPPO’s assumptions were erroneous, they should be willing to pivot or reverse course.
Seek for disconfirming evidence. HiPPOs should actively seek out evidence that contradicts their ideas and opinions in order to prevent confirmation bias. Organizations should encourage HiPPOs to take into account a variety of perspectives and participate in healthy discourse.
Embrace change. HiPPOs should be willing to embrace change and accept chances in order to avoid status quo bias. The culture of innovation should be fostered and encouraged within organizations, as should the spirit of experimentation and discovery.
Concentrate on future outcomes instead of previous investments to avoid the sunk cost fallacy. Instead of focusing simply on previous investments, organizations should encourage decision-makers to assess the prospective future benefits and costs of a project or initiative.
Analyze decisions objectively. In order to prevent being influenced by their hindsight bias, HiPPOs should evaluate their judgments objectively and place their primary emphasis on learning from their experiences. It is important for businesses to foster an environment of ongoing learning and improvement, one in which decisions are judged more on the basis of the results they produce than simply on the basis of the decision-making process itself.
In conclusion, experimentation and decision-making are the seeds from which innovation grows. Strategic decisions made by high-ranking executives based on their own personal biases and anecdotes rather than on controlled testing data, a phenomenon known as the HiPPO phenomenon, can be counterproductive to an organization’s creativity and efficiency. Heuristics and biases are ways that humans have evolved to deal with complexity and uncertainty, and they may play a role in the HiPPO phenomenon. In order to combat this, businesses can foster an environment that encourages experimentation and data-driven decision-making, as demonstrated by H&M.
This article’s scientific reference:
Thomke, S. H. (2020). Experimentation works: The surprising power of business experiments. Harvard Business Press.
Kahneman. (2011). Thinking, fast and slow (p. 499). Farrar, Straus and Giroux.
