Why do smart people make bad decisions?

With Congress grilling bank CEOs Wednesday, it's a timely question. Regulators and business leaders continue to try to figure out how decision-makers' missteps may have triggered the economic meltdown.

Sydney Finkelstein, a professor at Dartmouth's Tuck School of Business, has studied decision-making, and tried to track down some answers in a new book he's co-authored called "Think Again: Why Good Leaders Make Bad Decisions and How to Keep it From Happening to You."

Mr. Finkelstein and his co-authors looked at research in neuroscience and psychology as well as management. He talked with The Journal recently; here are edited excerpts of the conversation.

What are the main reasons that leaders make bad decisions?

Leaders tend to rely on past experience that seems useful, but is actually sometimes dangerous. One of the most well known [examples] is Dick Fuld at Lehman. He saved Lehman in the aftermath of the LTCM crisis in the late '90s. Fast forward 10 years or so and he also, I believe, thought he would do it again. But the experience he was relying on was not the same as this massive housing-driven collapse. It's much more complex, much more complicated.

We always talk about how important experience is. I think we overstate experience, because it doesn't exactly fit the situation you're in. You're liable to rely on it in a way that's just not going to be that helpful.

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Publication/Copyright: The Wall Street Journal