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How Fear Impacts Decisions, Strategy, and Innovation

While you may not realize it, fear can play a big role in how you make decisions (or don’t make them). Avoiding risk is often a useful guiderail when choosing one option over another, but being overly risk-averse can limit opportunities.

What’s more, we often misidentify drivers in decision-making such that we don’t acknowledge that fear is playing a role in what we decide to do. If we can account for how fear can impact decisions, we can get ahead of some of the negative effects.

Fear leads to blind spots and biases

There is a family of biases that are associated with fear in decision making. Here are a few of them:

Negativity bias

In general, negative events have a more significant impact on us than positive events, even if the negative and positive are relatively equal, and sometimes when the positive outweighs the negative. We feel negative events more intensely and remember them longer.

When making a decision, you are more likely to have negative information “front of mind,” which will color the choices you are willing to consider. This (unacknowledged) emotional component might, for example, lead you to dismiss data-based information or to ignore different perspectives that aren’t in agreement with yours.

Another way that negativity bias can impact your decision-making is in how it impacts what you believe about your own abilities. It’s related to challenges such as imposter syndrome and it can have a long-term impact on performance.

What about product decisions? It makes strategic sense to weight risks and consider potential downside on product decisions, but since we tend to focus on negative information most, it may sway product decisions out of proportion to any potential benefits.

When we think about organizations, negativity bias leads to a risk averse culture. Risk averse companies may be able to sustain “steady state” success for quite a while, even as industry and customer needs are changing. Then, all of a sudden, the change is past them and it’s hard to catch up. There might be disruptors (who by necessity embrace more risk) or they may fall out of touch with customers by “staying the course” based on assumptions that were true/verified 20 years ago.
Negativity bias can prevent people and organizations from innovating and taking necessary risks.

Loss aversion

Loss aversion describes the phenomenon that people feel the pain of loss far stronger than the pleasure of gain. It makes people want to hold onto the things they have and to be afraid of losing them.

At work, this might manifest as staying the course when change is needed. An example of this is continuing non-profitable products or programs long past when they should have been re-evaluated and/or discontinued.

On the other hand, FOMO (Fear of Missing Out) can drive people to do things they shouldn’t. You may have seen this in social media marketing campaigns attempting to jump on an internet trend or a meme, or using messaging that doesn’t match their brand values. Though it should be said that in the sales cycle some companies can take advantage of consumer FOMO, more often that’s seen in B2C/retail (think of manufactured discount days like Black Friday or influencer merchandise trends).

Endowment effect

The endowment effect refers to the fact that people sustain an emotional attachment to things they own and to value what they own higher than the actual worth. You’ve probably experienced how this happens in a work setting if you’ve ever heard people talk about people’s projects as their “babies.”

If you’ve put in significant effort or created a new project/program or championed a feature set/decision, you will endow it with high value. Then when indications are that you should stop investing in it, you are more likely to ignore/resist that decision.

Ambiguity effect

Given two options – one where you know the expected probability of the outcome and one where you don’t – you will likely choose the first option. We prefer certainty over uncertainty, especially when making high stakes decisions.

As author Michael Gearon explains, it happens because we associate missing information with negative information (i.e., a reason not to do something).

Making balanced/aware decisions

As with all biases, awareness is the first step. Then some due diligence will be helpful:

  1. When you have several options, asking yourself how you are weighting them can be useful – Is one of them easier? More familiar? Feels less risky?
  2. Take time to think through the data available, especially the data where your impulse is to dismiss it. You may think that you somehow “know more” than the data, or that there are other assumptions that are more important. But underneath that, you may find there are some fear drivers influencing your thinking.
  3. Document the upside and potential positive outcomes. Use a diverse team to discuss data and options – the different perspectives can act as a counterbalance to rushed decisions based on perceived risks or negative thinking.
  4. Get more clarity. You can do this by getting more/clearer data, through experimentation, or by bringing more diversity to the problem at hand.
  5. Go back to the real problem/goal. Sometimes people get derailed on sub-decisions while working through a problem or creating a plan to achieve a goal. If there are clear problem statements or goals, you can better filter the information you have and you will be able to take a step back from immediate biases.

Other ways that fear can affect strategic decisions

You may have heard the term “culture of fear” to describe a company. In these organizations, leader behaviors lead to a culture in which fear is the biggest driver of the decisions that managers and employees make.

There is a range of dysfunction that may result from a culture of fear and power dynamics is the root. In very dysfunctional organizations, fear is essentially operationalized.

  • Fear of new things. Leaders consistently quash ideas for change or innovation, and they may do so without realizing it. The reasons change ideas are rejected might be varied, but the general effect is that people stop trying new things, even when they may result in efficiencies or better performance. Sometimes managers show this behavior because the ideas weren’t theirs in the first place.
  • Performance pressure. In organizations where short-term performance is the primary/only criteria that drives strategic decisions, people become very risk averse/conservative in their decisions. This is sometimes made worse if leaders/managers lack confidence in their role or scope of ownership.
  • Change paralysis. When the velocity of change is very high and long-term, managers and employees become fearful of committing to any one idea or project since expectations or direction will likely change again. Similarly, in organizations where there is high leader turnover, employees often go into “heads down” mode since they have no trust or expectations of leader support.
  • Fear of rejection. In organizations with a closed leadership circle (especially if the leadership team is heterogeneous), employees may be fearful to approach or address leaders and will defer to the leader team for decisions that they can/should be making because the “people who make decisions” are only the ones inside that circle.
  • Reputational fear. This often shows up as a fear of making mistakes and if a manager has reputational fear, then the team members will feel inhibited about making decisions where they aren’t 100% certain about the outcome. If reputational fear is widespread in an organization, it is more likely that people get “thrown under the bus” when outcomes are not as expected or when mistakes are made.

Impact on innovation

Fear has a huge impact on an organization’s ability to innovate. A recent McKinsey poll found that 85% of executives agreed that fear holds back innovation efforts often or always in their organizations. Yet 9/10 organizations aren’t doing anything to allay these fears.

So, what might a successful organization look like? McKinsey found a high correlation between culture and employee experience, and an organization’s overall success at innovating. Fear is still there regardless, but successful organizations have fewer “fear factors” and are better at mitigating the negative impacts of fear in their strategy.

When low success innovators are compared to high success innovators, aggregate data shows that low success innovators are 4-6x more likely to cite fear of criticism, fear of uncertainty, and reputational fear as barriers to innovation.

Creating an innovation culture

Here are some of the markers of an innovation culture:

  • Innovation, curiosity, and experimentation are core values. But values must be lived to be effective, so leaders need to demonstrate and support innovation, and there needs to be operational support for innovation to have a chance at succeeding. There is a pervasive confidence that ambiguity is not a blocker to trying things or making decisions.
  • Messaging about innovation and risk taking that is permissive and optimistic. Everyone needs to feel empowered to participate in the process and to know that failure on the way to gaining insights is a good type of failure. Socializing stories about decisions related to innovation (good and bad) build a strong message that people should be looking for opportunities to innovate.
  • Recognition and rewards for people and projects. Not just for big impact performance improvements, but for interesting experiments, innovative teams, and individuals who are true innovators within the company. Recognize and share lessons learned and insights to help everyone to get better at their innovation mindset. Including related goals and projects in scorecards and KPIs helps to formalize recognition.
  • It’s baked in. Innovation should not happen “outside” of regular operations. It can be a way of working, even on a small scale with experiments. Regular customer observation should be the foundation of a continuous cycle of ideation to strategy. Organizations can also benefit from innovation events such as hackathons or innovation days.
  • People feel supported and empowered to participate. Rather than a culture of fear, people are empowered to suggest new ideas, to make decisions in their role even when some risk is involved, and to challenge “the way things are always done.” McKinsey research indicates that only 11% of companies with high fear cultures are leading innovators compared to 58% of companies with low fear cultures.

About the Author

As VP, Corporate Knowledge at Volaris Group, Sherry works closely with all of our organizations to capture & share best practices through peer programs, special sessions, portals, and communities. She also oversees Volaris Group platforms, technologies, and strategies that support our collaborative culture.

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