In his book, Professor Finkelstein argues that companies fail through pattern recognition and emotional tagging. The mind always relies on previous experience in judging current situations. But past experience can be misleading.
For example, in August 2008 Lehman Brothers was in big trouble like many other banks. CEO Dick Fuld refused to sell, believing he could ride it out. He had done this in other crises like for example the fallout from LTCM in 1998-99. But as Finkelstein points out, that crisis was less severe than the one Lehman Brothers faced at the time. The result: bankruptcy of one of America's most prestigious banks.
He argues that pattern recognition processes let us down when we are trying to judge the severity of a financial crisis, the value of an acquisition target or threat. What happens then is leaders form judgements without examining alternative courses of action.
Emotional tags attached to the patterns of experience recognized are also crucial. Emotions actually lead the decision-making process, providing focus and impetus to action – resulting in "feed, fight, flee or any other of the f-words" – without which the process would just be data-processing. Emotional tags provide short cuts but these can fool us. The problem is they are unconscious so we have no way of recognizing that it has happened, until it's too late. We fall victim to misleading experiences – where we think we recognize a situation but in fact fail to see why a new situation differs from an earlier one. As a result, we are fooled into taking very bad decisions.
The important part, says Finkelstein, is to learn from mistakes. For example, the Bay of Pigs was an absolute fiasco but President Kennedy learned from that and used those experiences in the Cuban Missile Crisis, forcing the decision makers to work until they reached consensus,. so as to avoid a flawed decision.
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