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The Downside of Transparent Decision Making

Posted By research by Ronen Gradwohl and Timothy Feddersen, Tuesday, May 1, 2018

from KellogInsight, January 4, 2018

It seems logical that you would want to be fully transparent when making a big decision, right? But according to a recent analysis by a pair of Kellogg School researchers, requiring transparency may actually yield less information than allowing deliberations to go on in private.

When Unanimous Is Misleading

You may have experienced an inkling of this phenomenon. Meeting minutes, for example, sometimes say that a particular vote was unanimous.

“Now, was it really unanimous?” Gradwohl asks with skepticism. “It could be that people went into the meeting with differing opinions, but they wanted it to look unanimous because they know that whoever makes the decision is going to try to read into not just what the recommendation was, but also how many people were in favor, and how compelling was the evidence that this was the right decision.”

For example, a group that wishes to open a new branch of a retail chain might consist of four people who believe the new location will be very profitable and one who is unsure. After learning how certain the others are, that unsure person is likely to assume that her information was simply inferior to everyone else’s and become convinced that the new location makes sense.

But if the decision-maker knew that one person started out uncertain about the new location, he might scuttle the project. So to make the most compelling case to the chain’s owner, it is in the best interest of the group to claim that all five people strongly believe the new location will be lucrative.

In other words, knowing that the decision-maker will have full transparency into the recommendation process can actually change  what people recommend. Moreover, knowing this, the decision-maker might be suspicious of a unanimous vote—and rightly so.

Thus, in this case, transparency fails to achieve its goal of revealing better, more accurate information.

A Babbling Committee

The researchers turned to game theory to model these sorts of scenarios. Their model is predicated on the idea that the committee and decision-maker have different incentives: the decision-maker might be more conservative, for instance, because he has more “skin in the game,” while the committee may be more open to taking smart risks. Their model also assumes that the only reason decision-makers turn to a committee is because they do not have all the relevant information themselves.

In the opaque version of the game—when the only information the decision-maker is given is the committee’s final recommendation—the model shows that the committee’s decision ends up accurately representing the group’s aggregate opinion; the rational decision-maker might then find the committee’s recommendation convincing and take action on it. In this case, opacity works well, according to the researchers’ model. Any differences between the committee members and the decision-maker in terms of motivations or tolerance for risk is neutralized.

“Then we show the opposite case,” Gradwohl says, referring to the scenario of full transparency. In this case, the committee members “don’t say anything meaningful.”

This complete breakdown of communication comes about gradually, as each player second-guesses the others.

Misaligned Incentives

Such scenarios—where decision-makers decide whether to demand full transparency when they seek recommendations from parties with differing incentives—are common in other contexts as well.

Consider the case of a manager debating whether to launch a risky new product. To help her decide, she turns to her employees, each of whom has information relevant to the decision. Is she likely to get better information by asking employees for their opinion one by one (analogous to transparency) or by letting the employees confer in private to come up with a joint recommendation (the opaque scenario)?

“Our result suggests that asking each employee separately would lead to less informative advice and would be inferior to letting the employees come up with a joint recommendation,” Gradwohl says.

For example, employees might be more eager than the manager to launch the new product, with less to lose if the product flops. So when the manager approaches employees individually, each employee has an incentive to exaggerate the new product’s odds of success.

But once again, the difference in incentives between the manager and the employees does not pose as much of a problem in the opaque scenario. If employees can have a private group discussion, they can freely share their information with one another before the group makes their joint recommendation.

For example, if all employees think the probability of success is low, the joint recommendation will be to not launch the new product—and the manager has less reason to doubt that the recommendation truly reflects everyone’s information. The same is true if all employees think the probability of success is high: they will recommend the launch, and the manager will accept the recommendation.

Lessons for Decision-Makers

Gradwohl’s main takeaway from the research is straightforward: “Think twice before implementing anything like radical transparency.”

Contrary to conventional wisdom, backroom discussions and other private conversations can be more helpful in getting people to share information.

“These sorts of offline conversations might actually be beneficial to everybody—not just to the committee, which is obvious, but also to the eventual decision-maker,” he says.

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