Monday, October 21, 2013

The Accuracy of Developing Feedback Loops in Strategy

In strategy, it is necessary to develop not only the action but also the feedback loop to ensure effectiveness. Research by Newell, et. al (2013) using dice rolls indicates that top-down strategies are quickly developed while the changing of poor strategic choices through bottom-up discoveries in feedback is much slower. It helps decision makers understand they may be quick to accept optimizing strategies but slow in adjusting course once those strategies are enacted. An unyielding strategy could potentially lead to poor results.

People often use probability matching when determining a strategy which is based on the probability of outcome.  In essence, if people believe they will have a payoff 70% of the time they are likely to choose that option 70% of the time even it could be chosen 100% of the time for more effectiveness. Optimization requires the ability to understand the factors within the game.

When people are provided feedback of outcomes it is believed they would optimize at a greater level than those who did not receive feedback. It is also believed that optimization for maximum results are ingrained into strategic decision making with feedback being a key factor that fosters effective behavior. Likewise, it is also logical that people should be open to feedback for improvement. 

When participants were provided with hints, they were much more likely to find an optimizing strategy. They did this by focusing on the payoffs of each dice role. Even when information is available without hints a large portion of people were unable to come to an awareness of a proper strategy. Strategy is then seen as a function of awareness of information within the environment.

The researchers Newell, et. al (2011) used two dice games with 7 greens and 3 red sides.  Some participants were provided with hints while others were not. Likewise, some were provided with feedback and others were not. They designed the games to ensure that both the maximization and the matching strategies were available as potential choices to determine what method participants used.

Despite having all of the information available from the beginning of the game, it was the feedback with a hint that helped participants maximize their strategies. A majority of participants didn’t appear to make meaning from the feedback information without a hint.  Participants that did formulate strategies sought and tested new strategies over subsequent trials.  A large percentage of participants thought of a quick strategy and used it throughout the game without changing their behavior. A small group of individuals were found with superior cognitive abilities that optimized their strategies without feedback or hints. 

The study does relate to business strategy development. Executives may use a particular strategy and continue with that strategy (top down) and ignore feedback (bottom up) that would help them adjust and improve their strategy. These strategic choices are often made in the earliest part of the game before information is readily available making them likely inaccurate.  This can lead to disastrous results when an environmental scan and feedback loop are not included to ensure direction adjusts to increase strategic accuracy. Even worse, if a poor strategy is used to its natural conclusion it may be far off of the mark.  A small percentage of people may be able to look at the factors involved, and develop their own strategies and have the cognitive flexibility to continue the adjustment of their approaches as information becomes available.  Openness to information equates to success in strategic management.

Newell, B, et. al. (2013). Probability matching in risky choice: the interplay of feedback and strategy availability. Memory and Cognition, 41 (3).

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