Everyone wants to make good decisions. So why don’t we make more of them more of the time?
The reason, of course, is that we’re human. But that’s not a very helpful answer, is it? If we want to be better decision-makers, we need to go a little deeper and try to discover the why behind the what. What’s the root cause behind so many of our poor decisions?
• Why do 44 per cent of lawyers recommend against pursuing a law career?
• Why do 60 per cent of executives say that bad decisions are as frequent as good ones?
• Why do half of all mergers and acquisitions destroy shareholder value?
Is it that we let our emotions cloud our objectivity? Is it because we are overwhelmed with choice? Is it because we are lacking all the facts? Is it perhaps all of the above?
Decisions don’t matter much if we are deciding what cereal to eat or even what dress shirt to buy. At the end of the day we don’t really need to justify our personal decisions because the vast majority of them are relatively trivial. But what about when you are considering hiring a financial advisor or buying a house? What about when you are considering introducing a new product line or reorganizing a company? Then the consequences aren’t so trivial, are they?
That’s when “being human” can be costly. That’s when the ability to make better decisions can push an organization forward instead of setting it back.
Intuition or metrics?
Entrepreneurs tend to act on intuition. They make decisions based on hunches bred from accumulated experience. Steve Jobs might be the most famous example. Corporate CEOs tend to manage by committee. They tend to make more data-driven decisions because they are accountable to others for their actions (Steve Jobs being a notable exception). Their business is simply too big to run on intuition alone, so they are guided by – among other things – certain quantifiable metrics, often in the form of financial ratios.
Intuition or metrics: Is there really a clear cut choice between the two? We know what metrics are. But intuition – we are not so clear about. Another word for intuition is gut instinct. Intuition can just as often drive the beleaguered entrepreneur to greatness as to ruin. The results of intuition appear to be as random as a game of chance.
We’ve all been told that in the absence of complete data, the entrepreneur is forced to make decisions by the seat of the pants. But are they really forced to or do they choose to? Even in the smallest companies, evidence and insights can be collected about the business from outside the entrepreneur’s mind. In a Harvard Business Review article called Don’t Trust Your Gut, Eric Bonabeau argues that “our desire to believe in the wisdom of intuition blinds us to the less romantic realities of business decision making. We remember the examples of hunches that pay off but conveniently forget all the ones that turn out badly”. Once again, intuition appears to be random.
But what is intuition exactly? Webster’s defines it as something that is known or understood without proof or evidence. Does intuition really help managers make better decisions in environments of uncertainty? As Bonabeau points out, intuition is not a means of assessing complexity but of ignoring it, so that the more complex the situation, the more misleading intuition is likely to become. “In a truly chaotic environment—where cause and effect no longer have a linear relationship—the last thing you want to do is try to apply patterns to it,” he says.
Nobel prize-winner Daniel Kahneman says we give too much weight to the information that’s right in front of us and not enough weight (often none at all) to the information that is just offstage. We have a tendency to believe that “what we see is all there is.” Chip and Dan Heath call it the spotlight effect. Perhaps that’s why entrepreneurs (and even many corporate CEOs) fail to gather information from “offstage” and use it to develop valuable insight about their own organization. Instead they rely on gut.
The alternative to intuitive decision-making is, naturally, evidence-based decision-making – something medical professionals have only recently adopted but are now employing with remarkable success. We’ll see how and if evidence-based decisions are making a difference in the business world (in particular the entrepreneurial business world) in Part 2.