Question

You are interviewing for a promotion to a senior management position. You have done well on the interview and are down to the final question. Interviewer: our company is quite concerned with how psychological biases lead to poor investment decisions.

Prompt: If you are promoted, discuss 2-3 specific practices you will put into place to help debias the decision-making process of your division. How will these practices improve investment decisions?

Answer 1

There is no right or wrong answer to this question. The question also very subjective and there is no end to it. I have put together my thoughts below. Please go through, add some more meat around them and create your own answer.

1. Decision making in my division is little biased towards using assumptions specific to the firm and not the division independently. While deciding, managers in my division see the return of the projects against the cost of capital of the entire firm. I believe this bias is not correct and hence I will need to de-bias the manager towards using the cost of capital specific to the division or the project being undertaken in the division. This will help them orient towards the real risks of the project being undertaken by the division. Impact on investment decisions: The benefit of this will be: the division will be able to undertake projects which it would have otherwise rejected based on negative NPV resulting from usage of firm's overall cost of capital.
2. Managers in my division have specific bias towards payback period. They believe projects with less than three years of payback only should be considered. The view is little myopic and short term.I need to de-bias them on this front. There are many projects where cash flows are little deferred towards the end but they generate high NPV. They are really value accretive, but get rejected due to short term thought process. This effort of mine to de-bias the division managers will help firm undertake those investments where cash flows may be little deferred but are really value accretive in the long run for the firm and the shareholders.
3. Managers in my division are obsessed with quantitative analysis. They by and large don't take into account qualitative factors such as impact on society, environment, corporate social responsibility while making decisions. As a result, many projects which the firm should have undertaken to serve the society and improve the environment get rejected. I need to de-bias the managers and orient them towards the importance of qualitative factors in decision making. The impact will be the enhanced sensitivity of the organization and managers towards society, environment and other social subjects.