The High Cost of Accurate Knowledge

Sutcliffe, K.M., Weber, K. (2003, May). The high cost of accurate knowledge. Harvard Business Review, 74-84.

Is little knowledge a dangerous thing?  For executives, not necessarily, these authors reveal.  New data reveal that the way senior executives interpret their business environment is more important for performance than how accurately they know their environment.  The authors suggest, “It’s not the accuracy and abundance of information that should matter most to top executives – rather, it’s how that information is interpreted.”

Most executives in this study judge their industries along three dimensions: volatility, growth trends, and complexity.  In this study of 329 top-management team members, researchers found the relationship between accuracy and performance to be linear and negative.  That is, any extra effort spent on improving the accuracy of top executives’ knowledge about the environment damaged rather than improved performance.  As accuracy of knowledge about the environment decreased, performance got better.

How do they interpret this counterintuitive finding?  They state that overestimating volatility, growth trends, and complexity generally leads to greater performance than underestimating them.  More accurate assessments of existing industry structures and overestimation of volatility may contribute to shying away from taking radical steps.  The authors found significant positive correlations between overestimations of industry growth and profitability, between overestimations of volatility and sales performance, and between overestimations of complexity and sales and profit outcomes.  The less top executives in their sample felt they were in control of their environment, the more likely their companies were to change, and the better they performed.

What, then, is the recipe for the right amount of environmental accuracy?  These authors recommend just enough accuracy that top managers feel out of control of their environment, but still optimistic.  Having a lower control orientation and a positive mind-set, aggressively seeking out and pursuing new opportunities, both internally and in the marketplace, are all correlated with success.  In short, any extra time or effort spent on improving senior executives’ market knowledge is wasted – and perhaps even damaging.

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