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Management happens
parts. They analyzed the bullet holes in the returning planes,
and set out a program to have these areas reinforced, so that
they would be better able to withstand enemy re. This may
seem natural enough, but it also contains a fundamental error:
selection bias.
Assume, for the sake of the argument, that planes got hit in
all sorts of places. If the areas which formed vital parts of the
machine were hit (call it part A), the aeroplane was unlikely to
make it back to base; it would crash. If bullets hit the plane in
parts which were not so vital (part B), the plane was much more
likely to make it back home. Then, military personnel would
inspect the plane and conclude, “Darn, this plane also got hit in
part B! We’d better strengthen those places . . .”
Of course, the military personnel were wrong. Planes got hit in
part A just as often as in part B; it’s just that the former never
made it back home. What’s worse, strengthening part B was
exactly the wrong thing to do: those parts weren’t so vital; it is
part A which needed strengthening!
This is why we call it “selection bias”; we only see a selection
of the outcomes, and therefore draw false conclusions. And
the world of business is full of this. Consider, for example, the
popular notion that innovation projects require diverse, cross-
functional teams. This notion exists because if we analyze some
ground-breaking innovation projects, they were often staffed
by such teams. However, Jerker Denrell from Oxford University
suggested that diverse, cross-functional teams also often created
the biggest failures of all! However, such failures never resulted
in any products. Therefore, if we (only) examine the projects
which actually resulted in successful innovations, it seems the
diverse cross-functional teams did much better. Yet, on average,
the homogeneous teams – although not responsible for the few
really big inventions – might have done better, always producing
a reliable, good set of results.
Similarly, we applaud CEOs who are bold and risk-taking, using
their intuition rather than careful analysis, such as Jack Welch.
However, risk, by denition, leads some to succeed but it also