“Strategic direction is more important today. It's about providing a framework for managers to navigate through the fog of complex chokes. No company can avoid this."

– C.K. Prahalad –

PoS Feb 2013 | Don’t bet the farm!

Nothing ventured, nothing gained. But how much risk is good? Is it worth betting the farm? The Lance Armstrong episode may have a lesson.

In January 2013 Armstrong confessed to having used banned drugs during his professional cycling career between 1998 and 2005. It was too late. In 2012 the US Anti-Doping Agency (USADA) had banned him for life from all sporting competition and the International Cycling Union (UCI) had stripped him of all seven Tour de France titles.

Answer to the first question lies partly in his belief that most cyclists at the top used performance-enhancing drugs. He may have convinced himself that if he didn’t he wouldn’t win.

It can explain why Armstrong used dope one time, or twice. But why did he continue to? Why didn’t he realise that he might lose everything if he was found out?

Framing and Decision-making – Armstrong’s decision to continue doping is best explained by the deep aversion human beings have for losses. A loss of $ 100 hurts more than the joy of winning the same amount. He may have felt he had to choose between losing options.

Stop doping and certainly lose races and the growing reputation as the world’s foremost road race cyclist – he was on his way to winning seven consecutive Tour de France titles. Or, continue using banned substances, maybe escape detection and continue to win laurels.

Between the two the latter appeared more attractive. Armstrong ignored the implicit attendant risk that being found out would lead to far greater losses.

Framing affects decision-making in remarkable ways. When choosing between gains we become risk averse. Faced with choices between losses people tend to take undue risk, as Armstrong did.

He made the risky choice just as Ramalinga Raju continued to cook Satyam’s books for eight long years. We make similar mistakes. We drive faster when running late to catch a plane. It doesn’t occur to us that it increases the chance of a grave accident.

Framing choices between losses also explains why Armstrong continued to vehemently deny accusations, the USADA report on his doping practice, and testimonies including those from some of his former teammates.

He could have admitted years ago, accepted a few years’ ban and returned to competitive sport. He didn’t. Intransigence cost him respect and adulation of millions of fans and admirers.

Risk, Gain, & Cost of Failure – Nobel laureate Daniel Kahneman showed that when framing choices between losses, risk seeking behaviour blinds us to the worst outcomes.

The future is uncertain and human judgement fallible. That is why it is unwise to bet the farm. Risk, gain, and cost of failure must be weighed together. That advice was good for Lance Armstrong, and is good for us as individuals and managers.

V.N. Bhattacharya
Business Strategy Consultant

For more on framing effects, read Overcoming Decision Flaws