Ken Shotts: Better Decisions Spring From Competition and Balance in Organizations

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Former President John Kennedy (R) meets with then Secretary of Defense Robert S. McNamara and Chairman of the Joint Chiefs of Staff General Maxwell D. Taylor in the Oval Office at the White House in 1963. | Reuters/Abbie Rowe/John F. Kennedy Presidential Library and Museum/Handout via Reuters

Most people know what almost happened in the fall of 1962. After the Soviet Union started building nuclear missile launch sites in Cuba, U.S. military leaders advised President John F. Kennedy to bomb and invade the country. The world was perhaps never closer to nuclear war.

The Joint Chiefs of Staff, the military men recommending aggressive action, had stature and skill. Most were veterans of World War II. In addition to formal authority, they had incredible informal power that stemmed from their experience and from having the resources of the Pentagon at their disposal.

But Kennedy didn’t acquiesce. Instead, he sought the counsel of others, including his brother, Attorney General Robert F. Kennedy, Defense Secretary Robert McNamara, and experts at the Executive Committee at the National Security Council.

As a result of having competing policy ideas to consider, he was able to develop a policy that combined blockade and diplomacy, possibly averted a war, and resulted in the establishment of the famous hotline between Washington and Moscow.

The Cuban Missile Crisis is a compelling example of the difficulties that confront a leader advised by people of great but informal power. Sometimes, a decision maker may lose power to those beneath him or her in the chain of command because of other players’ ability to set agendas or conceive and carry out policies so expert they crowd out other ideological viewpoints.

New research from Kenneth W. Shotts, the David S. and Ann M. Barlow Professor of Political Economy at the Stanford Graduate School of Business, and Alexander V. Hirsch, associate professor of political science at the California Institute of Technology, analyzes this balance of power between leaders and the policy developers around them.

The analysis, based on a simple mathematical model, offers insights for leaders who want to make the most of people with informal power without being overwhelmed by them. The researchers found that the best way to restrain actors with a lot of informal authority, also called “policy-development monopolists” in the research, is a system of checks and balances.

“The lessons are about how to harness the informal authority to aid the organization,” Shotts says. It’s useful to have competition as well as counterbalancing authority, he says.

“Broadly speaking, the way to restrain a monopolist is to threaten an outcome she dislikes unless she develops a high-quality policy that promotes the decision maker’s objectives,” Shotts says.

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Illustration by Tricia Seibold

The researchers say leaders can improve the quality of their decisions and take advantage of monopolists’ skills by:

• Establishing in-house policy development capability
• Delegating authority to someone who counterbalances the monopolists
• Fostering competition between policymakers with different ideas

In the case of the Cuban Missile Crisis, Kennedy used two of these tactics — he developed internal policymaking authority in the Executive Committee at the National Security Council. He also relied on competing policymakers — his brother and McNamara — to weigh in against the Joint Chiefs. The result was that he had an ultimately successful, robust policy plan to keep the missiles out of Cuba and forestall a military encounter.

The Model

The researchers’ mathematical model treats policymaking as a game. Each actor aims to win with his or her own policy idea. The quality of the ultimate decision is defined to include some elements valued by both the decision maker and the person with informal authority. Those elements include cost savings, efficiency of implementation, and low risk of the outcome. For instance, in the Cuban Missile Crisis, a policy that reduced the risk of nuclear war was clearly in everyone’s interest.

Shotts says the researchers have steadily found other situations in which their research yields insights: how the financial industry should be regulated; effects of term limits on state legislatures; and even, perhaps, the question of why citizens elect populist leaders.

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Illustration by Tricia Seibold

What Does a Monopolist Look Like?

The first step for a decision maker is to recognize a person or group with informal authority. In the Cuban Missile Crisis, the monopolists looked like military heroes. In the workplace, a monopolist is someone with the skills necessary to develop a new project, anything from charm to experience to the harder skills, like technical mastery. Monopolists’ ability gives them de facto power within an organization, even if they don’t have formal power. Shotts and Hirsch argue leaders do well to recognize such policy developers, respect them, and keep them engaged and in check.

“In our model … the key problem is that a policy developer can use informal agenda-setting power to promote her own interests without benefitting the decision maker,” Shotts and Hirsch write.

Using the Model to Find Flaws in Decision-Making

Monopolists can be found throughout the political system. In state legislatures, for example, term limits reduce the power of legislatures and increase the power of governors and interest groups, especially in small states that don’t have professional legislative staff. With the power of lobbying organizations or state bureaucracy at their disposal, these monopolists can craft policy at a higher level than the legislators, who have less internal capacity to research or do the groundwork necessary to craft detailed legislation.

In a society aiming for representative government, that’s probably a bad outcome, though the researchers say that it’s possible a number of powerful interest groups could balance each other out and leave even a term-limited legislature in control.

Another interesting application for this research is financial regulation. One popular theory suggests that the industry should be regulated by insiders — people with expertise who understand the complexity of finance. Many of the regulators who oversee American finance are seen as having close ties to the industry, including the Securities and Exchange Commission, which regulates public companies and banking, and the Financial Industry Regulatory Authority, an industry group that regulates broker-dealers.

But Shotts and Hirsch’s research indicates a regulator in opposition to the industry — a skeptical overseer — is most likely to produce the best outcomes for leaders because that overseer can counterbalance monopolists.

The researchers said that in their model, “there is no public-policy justification for creating a pro-industry agency.” Their model suggests that the only reason for a pro-industry agency to exist is because of the industry’s desire to “capture” the agency.

The researchers suggest their model could also shed light on other areas of political economy, including, most tantalizingly, why people elect or follow populist leaders who have extreme political leanings.

In those cases, the citizens — the decision makers — may seek to counter the influence of economic elites — the monopolists — by electing someone in opposition to them.

“The model supports the idea that systems work best when there is a balance of power of viewpoints, and that people act to bring a system back into balance when it has fallen out of whack,” Shotts says.