Despite the importance of decision-making, and despite all the research into decision-measurement that has taken place over the past three decades, studies continue to show that the majority of business decisions are simply wrong. Which begs the question:
Before trying to answer this question, it’s worth ask a slightly simpler one: How do we go about making decisions? As I mentioned in Part 1, low-stakes decisions like whether to have the turkey or the chicken sandwich are made quickly and without much thought. We use heuristics to do this. A heuristic is simply a rule of thumb or mental shortcut that allows us to make judgments quickly and efficiently without having to stop and deliberate. High-stakes business decisions, on the other hand, are made much more thoroughly, rationally and deliberately. Or are they?
Neuroscientists now accept the idea that emotions play a significant role in decision-making. But because neuroscientists tend to make things complicated and because decision-making is such a complex, multifaceted process, I decided to search for a simple definition. I found one in Chip and Dan Heath’s new book, Decisive: How to Make Better Choices in Life and Work.
This is how the Heaths define the decision process:
1. We encounter a choice
2. We analyze our options
3. We make a choice
4. We live with the consequences
Sounds simple enough, doesn’t it? But the devil is in the details. The Heaths tells us that four ‘villains’ appear every time we make a decision, and they are intent on sabotaging us.
1. We fail to look at all our options;
2. We don’t gather enough objective information;
3. We get side-tracked by hidden emotion;
4. We are overconfident.
We begin by framing the choice we are about to make in an incomplete and subjective way. Then we cloud it with emotion that we cannot see or feel. And finally we conclude our decision-making process by rationalizing it. Why? So we can live with our choice. Not a very rational way to decide, is it? Thankfully, business leaders don’t fall into this trap. Do they?
Yes. They do. And they do it more often than not.
A famous example is William Smithburg, the CEO of Quaker Oats. Smithburg purchased the parent company of Gatorade for $220 million simply because he liked the taste. That decision, impulsive as it was, worked out well for Quaker Oats. But then Smithburg tried his luck a few years later. He bought Snapple for $1.8 billion, and this time the acquisition turned out to be a disaster. The two companies’ cultures and distribution systems and customers were totally different, and they simply couldn’t be integrated. The acquisition nearly sank the company, and Smithburg resigned.
Later, he recalled that during the decision-making process there was no one on the “no” side to balance things out. Really? It’s staggering to think this was allowed to happen. But remember, thanks to the Gatorade acquisition, Quaker Oats’ CEO was riding a hot hand. He might even have been considered an acquisitions ‘genius’ who could do no wrong. As a result, he was allowed to spend nearly 2 billion corporate dollars on, as it turns out, little more than a whim. Smithburg wasn’t even making a simple yes/no decision. It was a yes/yes choice. He didn’t even ask if there was another alternative. He didn’t consider the opportunity cost, or even whether they should spend $1.8 billion dollars at all.
What can we do to make better decisions?
What can we do to avoid these, and other more subtle, kinds of decision errors? One way is to widen our alternatives. Research shows that only 29 per cent of organizations consider more than one option when making high-stakes decisions. The reason? Narrow framing, which biases leaders into thinking that the choice is clear when it is not. Smithburg was guilty of narrow framing his decision.
To make better decisions, leaders need to:
1. Widen their options
2. Reality test their assumptions
3. Attain distance before deciding
4. (And the biggie)… Prepare to be wrong
All four require extra work, but the last one is the most difficult of all. Being wrong can be career threatening, depending on the organizational culture within which the decision process is made. If the culture discourages risk-taking, then being wrong can be fatal. But so is a risk-averse organizational culture. Is the payoff worth the work? When the stakes are high, yes, absolutely.
But given the stakes, why doesn’t business decision-making follow in the footsteps of manufacturing processes like TQM (total quality management) and Six Sigma where defect rates are less than 1 in 250,000? Why are decisions made so carefully and scientifically in manufacturing plants but, as Dan Heath points out, “at the top of organizations, decisions—even those in which millions or billions of dollars are at stake—are often made based on politics or personality or a good PowerPoint presentation?”