Is Diversity (Un-)Biased? Project Selection Decisions in Executive Committees

Abstract

Problem definition: Is a committee composed of more or less cognitively diverse members better at approving the “good” projects and rejecting the “bad” ones? Academic/practical relevance: We contribute to the operations management literature by accounting for the fact that critical selection decisions are often made by a committee rather than a single decision maker. Understanding how the magnitude of diversity affects the decision quality of such a committee is an important consideration for practitioners. Methodology: We utilize a game-theoretic model to show that diverse perspectives are rarely “averaged out.” Results: Diversity leads to systematic biases in project selection. To mitigate the effect of diverse perspectives, managers need to uncover the sources of diversity: do they originate from different individual valuations and preferences, or do they express different assimilations of the information that arises during the project execution? We show that this distinction is crucial. Higher preference diversity always leads to higher likelihood of making the wrong decision. Higher interpretive diversity may be beneficial for the organization. Managerial implications: A clear managerial action is the need to identify and reduce such preference diversity. Senior management can achieve this by highlighting the need for more transparency in the pipeline of the business units. Moreover, our analysis shows that interpretive diversity can be a powerful managerial lever to influence the propensity for Type I and II errors. The latter might be easier to manage than the organizational structure.