The “finest in finance” were being recognized by CFO magazine in October 1999. Experts from the industry were raving about the innovative and remarkably sound financing techniques pioneered by a hot-shot chief financial officer (CFO) who was being awarded the CFO Excellence Award for Capital Structure Management. When other finance experts were interviewed about this CFO’s achievements, they were enthusiastic in supporting his ability to develop capital-intensive businesses without reducing credit quality. The company he worked for was held up by analysts as a “paradigm company” to vaunt. There was no shortage of industry insiders willing to shower accolades on the innovative company and its creative CFO for their achievements.
Today, the mention of CFO award winner Andrew Fastow and his company, Enron Inc., is more likely to generate shakes of the head and feelings of outrage. Still, when Enron was at the peak of its success, there was no shortage of people willing to appreciate their creativity and innovative approaches to financing. “Experts” attributed their success to a variety of astute business decisions and even held them up as an example of a company to emulate. Less than 10 years later, there are an equal number of experts who use Enron as an example of insidious corporate culture, overwhelming arrogance, a complete lack of ethics and more. Not so long after holding up the company as an example of how to innovate and thrive in a competitive environment, Enron is used as an example to teach lessons on ethics and corporate management gone wrong.
Psychologists label this tendency for humans to ascribe success or failure to features of the “actors” in the environment (instead of simply circumstance or chance) the “fundamental attribution error”. It is disconcerting to acknowledge that the outcome of most events is strongly affected simply by the context within which the events take place. As a result, we find ways to attribute the outcome to the players on the stage. In a widely referenced study, subjects were asked to watch videotapes of two basketball players. One of them was shooting baskets in a well-lit gym while the other was shooting baskets on a very dimly lit court and missing several shots. Later, the subjects were asked which of the two players was better. Most people easily answered that the player shooting in the well-lit gym was a better player. The interesting insight was that few people gave any thought to the possibility that the difference in lighting could have been the source of performance differential between the two players. Rather, they attributed the difference in the performance to the players rather than their environment.
The implications of this attribution error are broad. We tend to underestimate the impact of situation and circumstance in evaluating outcomes. So, we pore over cases on company failures in the hopes of avoiding those outcomes by not making the same mistakes. Instead, it would probably be better to spend less time analysing the company’s actions and more time looking at the environmental factors that could have affected the outcome.
When evaluating the resume of a job seeker, we tend to make all sorts of personal attributions for their work history when most of the career decisions could have been the result of environmental constraints. When someone cuts in front of us in heavy traffic, we attribute it to the person’s carelessness and recklessness instead of their attempt to avoid hitting another erratic driver’s vehicle. And when we assess the performance of CEOs or politicians, we tend to attribute their success to their incredible management style rather than luck or circumstances. Some have argued that the fundamental attribution error even applies to countries and their performance. When the world raves about the progress of India and China and their place in the next millennium, they argue, they may be committing the fundamental attribution error by giving too much credit to the actions of the Indians and Chinese in managing their economies. As has been the case for several developed countries, it is possible that some of the moves made by these countries were purely by chance rather than intent, and they were benefiting from being in the right place at the right time. This suggests that it would be dangerous for the countries to become complacent and attribute their current successes to a particular set of actions or attributes.
The way to avoid falling victim to the fundamental attribution error is to consciously focus on whether you are unfairly assigning an outcome to an individual rather than their situation. Every time you make a snap judgement about the motivations of people around you that you don’t know, come up with an alternative explanation of their behaviour that externalizes the outcome and attributes it to their situation rather than their ability. Often, you will find the alternative explanation is equally plausible. We are not proposing that people should not be held responsible for their actions. Instead, every time we attribute an outcome to an individual’s actions, we need to use caution so that we don’t end up blaming or rewarding that individual for outcomes that were largely beyond their volitional control.
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Praveen Aggarwal is an associate professor of marketing at the Labovitz School of Business & Economics at the University of Minnesota Duluth and Rajiv Vaidyanathan is a professor of marketing and director of MBA programmes at the University of Minnesota Duluth.