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The Middleman: Stubborn Behavioral Biases in Business Decision-Making

Technology is at the forefront of every modern business strategy. From automation to artificial intelligence, we've come to accept, sometimes begrudgingly, that technology often replaces human roles for better outcomes and efficiency. Yet, there exists a curious resilience among certain middleman roles that defy the technological death knell. Why is this? While technology certainly plays a role in their survival or demise, the real drivers often reside in the realm of behavioral economics and organizational psychology.

A Look Back

There was a time when the fastest and most reliable way of sending a message from New York to San Francisco was using a telegraph operator as an essential middleman. With the rise of the telephone, telegraph operators were replaced by switchboard operators. Switchboard operators were replaced by analog switches, then by computer servers, and by cell towers. The telegraph operator was not replaced by one technology but by many. If we look closely, we find it wasn’t just technological leaps that led to the extinction of the telegraph operator’s role, but also deeper forces: convenience, social acceptance, and behavioral change. As technology advanced, so did consumer expectations for speed, reliability, and convenience. The telegraph, once revolutionary, eventually became cumbersome compared to the ease of dialing a phone number. Accessibility played a crucial role, too. One didn't need specialized knowledge to operate a telephone, making it far more user-friendly than a telegraph. Over time, the behaviors that made telegraphs popular—like their perceived reliability and speed—became outdated metrics for evaluating communication methods. People started prioritizing instant connectivity, ease of use, and the ability to communicate from anywhere. This shift in behavioral expectations pushed the telegraph operator further into obsolescence as consumers chose newer technologies that better aligned with their evolving needs. Each step in the evolution of communication, from technology to adoption cycles, required investment, development, and, eventually, depreciation. In a time of transition, people stuck with what they were used to. When phones were available, many still used Jeb the telegraph operator, because it was what they knew. After they switched, they enjoyed a quick chat with Sally as she connected their call and lamented when they had to dial manually. Fast forward: Eliminating telephone landlines is the latest evolution; they are only used by those who haven't yet adapted.

What outdated institutions promoted by 'trusted middlemen' still remain in your organization?

Behavioral Roadblocks: Status Quo Bias and the Principal-Agent Problem

Status Quo Bias

At its core, the Status Quo Bias represents our inherent resistance to change. It's a cognitive bias that means people prefer things to stay the same, even when change might be beneficial. This inertia can be fueled by fear of the unknown or an emotional attachment to the current way of doing things. For businesses, the status quo bias can manifest in numerous ways: clinging to legacy systems, reluctance to adopt new technologies, or even staying loyal to inefficient vendors.

A great example is the transition from paper invoicing to electronic invoicing. Despite the clear advantages of e-invoicing—such as reduced costs, faster payments, and environmental benefits—many businesses initially resisted the shift. The comfort of the familiar paper trail was hard to abandon, even when the benefits of the newer system were undeniable. Executives should be wary of decision recommendations strongly advocating for the status quo to avoid risk. While holding the current path may be prudent, be careful not to underestimate the risks of inaction. While there's comfort in familiarity, being tethered to the 'way we've always done it' can hinder innovation and growth.

Principal-Agent Problem

Another critical challenge in the business landscape is the Principal-Agent Problem. This situation arises when one entity (the agent) influences the decisions of another (the principal) when their interests might not perfectly align. In the context of 'middlemen,' this often translates to intermediaries potentially not always acting in the best interests of their customers.

Take employer benefit brokers, for instance. These brokers are tasked with finding the best insurance and benefit packages for companies (the principal). However, the brokers (the agents) might be swayed by specific insurance providers offering them higher commissions or other incentives. As part of their trusted relationship, these middlemen may offer add-ons that don’t add value to the employer but do increase the broker's commission (and the benefit vendor’s profit). As a result, a company could end up with a benefits package that might not be the most cost-effective or best-suited for its employees.

The organization then bears the cost of this misalignment in interests. This divergence can lead to higher costs, misaligned benefits, or other less-than-optimal outcomes for the company and its employees. Executives need to remain vigilant to such discrepancies and implement measures to ensure that the interests of agents align closely with those of the company. Yet, it wasn't just these technological leaps that led to their fading prominence. Once we recognize these behavioral roadblocks, we're better equipped to navigate them.

Charting the Path Forward

Awareness is the first step in tackling challenges in biased decision-making. By understanding the behavioral roadblocks like status quo bias and the principal-agent problem, executives can more effectively question and analyze their current business landscape.

At every decision-making opportunity, ask if there is a better way. Are you still using a telegraph when a better solution exists? Are you still talking to the switchboard operator when you could be talking directly? Are external motivators aligned to your company's benefit, or do they serve other interests? Will my competitors gain an advantage if they find an evolutionary solution to this first?

Asking questions that challenge the status quo promotes a culture of transparency and alignment within the organization. Evaluating decision-making processes highly influenced by incentivized middlemen may reduce strategic misalignment. As you lead with bias-reducing decision strategies, others begin to challenge assumptions, and transformation accelerates.

Your impact

If you were to do a cost-benefit analysis today on the value of bringing back paper invoicing, the value proposition would not exist. The cost added to employer benefits by motivated outsiders may also prove ineffective in hindsight. It is easy to wait until we have no choice but to switch from Jeb the telegraph operator, to Sally at the switchboard, but true leaders were those who questioned the status quo, anticipated change, and adapted early. They didn’t react when they had no choice, but they proactively invested to eliminate the middleman.

Decision-making is at the core of every leader’s skillset. Tune your decision-making strategies to eliminate bias and align interests. Challenge the status quo, question the value of motivated agents, and reject the assumption that avoiding change is the lowest risk strategy. Leadership demands foresight and adaptability. As business landscapes evolve, so must our strategies. Challenge conventions, question the roles of middlemen, and lead with clarity, bias-free.

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