... Managers attempt to make sense of the environment and predict what will result from their decisions.
The problem is that there’s plenty of random noise in competitive strategic decisions. Predicting where the ball will go is equivalent to deciding whether to open a chain of seafood restaurants on the Gulf Coast. The dog running off with the ball is the BP oil spill. When the board reviews the manager’s performance, they’ll focus on the failed restaurants. The stock is down. The chain lost money. Since the manager’s compensation is tied to results, he’ll incur financial penalties. To save face and appear to be taking action, the board may even fire him—thus giving up on someone who may be a good manager but had bad luck.
The oil spill example is an extreme case. In the real world, the random noise is often more subtle and various—a hundred little things rather than one big thing. But the effect is the same. Rewarding and penalizing leaders based on outcomes overestimates how much variance people actually control.