“The core of leadership is assembling the right people to make quality decisions.” —Peter Drucker
“The role of any leader is first and foremost assembling the right team. . . . Number two is making sure decisions are being made.”—Jack Dorsey, founder of Twitter and Square
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CORE CONCEPTS
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THE PROBLEM WITH DECISIONS
“Half of the decisions made in organizations fail, making failure far more prevalent than previously thought.” — Paul Nutt: Why Decisions Fail
Biases: “Aren’t most businesses and individuals already making high-quality decisions?” The answer is no. (…) Fifty years of behavioral decision science research have revealed hundreds of biases that are part of human mental processes and social behaviors. Thus, although people widely believe that they are inherently good decision makers, this belief is an illusion—a dangerous one.”
Decision science shows us, people are not wired to make good decisions when dealing with uncertainty.—Carl Spetzler
The “No Bias” bias: We, humans believe we are not as affected by biases as we really are. “With hindsight bias, we rationalize our decisions to reassure ourselves they are good—but that is an illusion.”
Satisfising: People often don’t make the best possible decision. We are prone to rationalize and be satisfied with a good enough solution. “This term was first coined by Herbert Simon, the Nobel Prize–winning economist and social scientist who recognized that individuals and groups do not optimize (as was part of orthodox economic theory at the time) but rather use “bounded rationality” and “satisfice.”
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WHAT IS DECISION QUALITY?
Waiting to the outcome to occur is impractical and often impossible. We have to judge the quality of the decision immediately after it has been made.
Use the DQ slider scale to evaluate every component of the decision.
We can reach 100% when the extra improvement in decision quality does not worth the extra resources.
Question to ask:
Does the improvement on any of these components add more value than their cost in terms of time and resources?
“A high-quality decision has a 100% quality rating for each of the six requirements for DQ.”
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Decision vs Outcomes
There is a big difference between a good decision and a good outcome. Decisions that involve uncertainty we can never be absolutely certain that the outcome will be positive, because of the factor of uncertainty.
“The quality of a decision cannot be judged by its outcome. (…) Determining the quality of a decision by its outcome would require withholding judgment until everything there is to know about the result becomes available. That’s impractical—and often impossible.”
With DQ we can judge the quality of the decision in real time, to be certain that we made the best possible decision.
We can control the process of making decisions but we cannot control the outcome. – because of the uncertainty involved in every decision.
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THE 6 REQUIREMENTS OF DQ
An appropriate frame —> It is the specification of the problem that needs to be solved. We have to solve the right problem.
Creative alternatives —> Define what else we can do.
Relevant and reliable information —> What we know and do not know.
Clear values and trade-offs —> What we want and hope to achieve
Sound reasoning —> Understanding what we should do.“Guides us to the best choice given what we want (values) and in light of what we know (information)”
Commitment to action. —> The willingness to act based on the decision made.
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DIAGNOSING THE SITUATION
“A decision situation must first be diagnosed, just as a medical doctor would diagnose a patient’s condition before creating a course of treatment.”
The 5 dimensions of understanding a situation
1. Magnitude
Quick decisions —> require immediate response
Significant —> somewhat complex, may appear several times a week
Strategic decisions —> complex and most critical decisions
2. Organizational and Analytical Complexity
Organizational complexity —> involves many people with conflicting priorities
Analytical complexity —> involves many, usually technology related uncertainties
3. Three scenarios
High organizational complexity, low analytical complexity —> requires leadership
Low organizational complexity, high analytical complexity —> requires technical skills
High organizational complexity, high analytical complexity —> requires both
4. Content challenge
When the content of the decision situation is not available or hard to access. There are very little data that can support the decision.
5. Decision Traps
Do we understand the situation enough to not fall into common decision traps?
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DQ FRAMEWORK
FRAMING
Proper framing prevents solving the wrong problem. It also makes decision-making efforts quicker and easier.
Framing answers the question, “What problem are we trying to solve?”
“A problem well stated is a problem half solved.”—Charles F. Kettering
What kind of problem or opportunity are we talking about?
“If I had an hour to solve a problem I’d spend fifty-five minutes thinking about the problem and five minutes thinking about solutions.”—Albert Einstein
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PURPOSE
We have to reach an agreement on what are we trying to accomplish?
ASK QUESTIONS
What kind of problem are we talknig about?
Why we care about this problem or opportunity?
How will we know if we’re successful?
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SCOPE
What are the crucial aspects of the situation that we want to focus on?
Scope is prioritisation. It determines what aspect of the problem or opportunity are we focusing on and which aspects are we ignoring.
Defining the scope of the decision is like framing a photo: determining what parts of the picture will be included and what will be left out.
We can avoid making the frame of the decision too narrow or too wide.
EXAMPLES
Modernizing a manufacturing plant: what particular processes are we trying to modernise? just the manufacturing or packing or delivery service?
Which customers are we focusing on?
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PERSPECTIVE
Perspective is out way of seeing the world. It is part of our mindset, influenced by many-many unconscious assumptions, based on our unique experiences and expertise. It is also shaped by our personality.
How do we see the situation?
Every person has his or her unique perspective. We see the world in a certain way, have our own opinions, assumptions and beliefs. These things greatly influence the decisions we make.
“That’s why sharing our perspectives with others and developing a frame in collaboration with other stakeholders enhances our understanding of a decision problem—especially when people with different viewpoints are involved.”
WHAT TO DO?
Invite a diverse group of people who have multiple perspectives to frame a situation.
Try to see the same problem from the perspective of different stakeholders.
Suzy Welch’s recommendation is to consider the situation in different time frames. This is the rule of 10-10-10. How would you feel if you’d make that decision in the next 10 minutes, 10 months, and 10 years.
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A FRAMING TOOL: THE DECISION HIERARCHY
“A decision hierarchy can help define the scope of a decision problem, providing focus and preventing the frame from including too much or too little.”
Organize decisions into 3 groups
1. Decisions that have already been made, which are taken as given.
2. Decisions that need to be focused on now.
3. Decisions that can be made either later or separately.
CREATIVE ALTERNATIVES
Our decision is just as good as the best alternative.
We commonly approach problems by asking ourselves, “What should I do?” Asking “What could I do?” helps us recognize alternatives to the choice we are facing. —John Beshears and Francesca Gino
“An alternative is a possible course of action, defining what could be done in the context of the frame for a decision.”
Since a decision doesn’t get any better than the best alternative, it’s important to develop a good set of choices that truly represents the range of what we can do.
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A GOOD ALTERNATIVE
It is creative.
It isn’t the first thing that pops into everyone’s mind.
Significantly different than the other alternatives.
Covers a broad range of possibilities.
It is a real candidate for selection. It is actually that you can be satisfied with as a possible course of action.
Compelling. It generates excitement. People actually want to examine further the possibility.
Doable and actionable. It actually can be implemented.
Sufficient in number but also manegable in number. Not too many and not too few.
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THE PHASES OR GENERATING ALTERNATIVES
1. EXPANSION PHASE
Do not evaluate decisions in this phase.
Try to generate as many ideas as possible.
Group techniques, such as brainstorming can be used at this phase.
1. CONTRACTION
The number of decisions are reduced to a managable set that can be evaluated properly.
The result should be a set of feasible alternatives.
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A BAD ALTERNATIVE
It is straightforward and obvious.
It is the first thing that pops into everyone’s mind It is could’ve been expected and not out of the box.
Just a minor variation or the main idea.
Limits the possibilities to one or two course of action.
Not a real alternative, just a placeholder, just makes other alternatives look good by comparison.
Immediately rejected by everyone in the group, obviously not a good course of action.
Good in theory but impossible to implement in real life.
Generating too few or too many alternatives.
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THE STRATEGY TABLE
Technique for evaluating alternatives.
The same shapes represent the similar alternatives or with the same benefits. This way you can identify patterns.
RELEVANT AND RELIABLE INFORMATION
Information is a source of learning. But unless it is organized, processed, and available to the right people in a format for decision making, it is a burden, not a benefit.—William Pollard
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THE PROBLEM WITH TOO MUCH INFORMATION
Today we are living in an age of information overload. Our attention has become the most precious commodity. Every people try to present their information as the most important.
Selecting the relevant information and filtering out the irrelevant is one of the most important skills a decision-maker can master.
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WHAT IS RELIABLE
“Accurate and unbiased, not based on false beliefs or obtained from untrustworthy sources.”
The best decision-makers do not accept information that cannot be empirically verified.
“In the pursuit of reliable information, the goal is not to eliminate uncertainty, but to obtain informed and unbiased estimates of probabilities and ranges for uncertain outcomes.”
BISASES OF INFORMATION
Biased sources.
Data containing errors.
Information sources without expertise.
Information that has been cherry-picked to justify certain conclusions.
The temptation to seek only the information that supports biased opinions and assumptions.
Overconfidence—that is, believing that we know more than we do.
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POSSIBILITIES AND PROBABILITIES
POSSIBLILITIES —> answer the question, what could happen.
PROBABILITIES —> our beliefs about the likelihood that something will happen.
“Because the future is uncertain, we need to describe the future with possibilities.”
“Though humankind has tried for thousands of years to avoid uncertainty—even by reading the stars, tea leaves, and sheep entrails—there is no escape from making judgments in the face of uncertainty.”
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DECISION TREE
Technique for evaluating alternatives.
It is a tool for structuring a decision that helps us gather RELEVANT information.
Every decision involves uncertainty. Therefore every decision is subjective. These tools simply help us to express those subjective judgments.
EXAMPLE
Michael wants to decide to stick with his current job (which is stable but less satisfying) or to accept an offer from a startup company (which is more exciting but involves significantly more uncertainty).
CLEAR VALUES AND TRADEOFFS
We cannot effectively compare alternatives until we clearly understood what we want.
What makes one alternative more attractive than the other?
Which alternative we prefer and why we prefer it?
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TRADEOFF
When values are not entirely comparable there is always a tradeoff.
Clarifying trade offs makes it easier to compare choices.
EXAMPLE
The more frequent tradeoffs are: frequent tradeoffs: time, money, energy, stress, life satisfaction
Income and family time: giving up 10 hours of family time but getting a higher income.
MAKING TRADEOFFS IN BUSINESS DECISIONS
We have to start with the clear understanding of alternatives.
We have to translate indirect and intangible values into tangible values —> it will make the comparison much easier.
Step 1: Substitute Equivalent Monetary Amounts for Intangible Values
Step 2: Substitute Present Equivalent for Cash Flows Over Time
Step 3A: Substitute Expected Value for Uncertain Outcomes
Step 3B: If Needed, Use Risk Appetite to Calculate Certain Equivalents
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HOW TO JUDGE THE QUALITY OF VALUES
“Are we clear on what we want from this decision?”
“Do our stated values incorporate the perspectives of all key stakeholders?”
“Do we understand how to measure each of our direct values?”
“What tradeoffs must be considered in choosing the best alternative?”
“How would the decision change if different tradeoffs were made?”
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Values in a Business Context
DIRECT VALUES
“Shareholder value is typically measured using net present value of future cash flows, or NPV.”
“Shareholder value is typically measured using net present value of future cash flows, or NPV.”
INDIRECT VALUES
Profit margin is an indirect value by which we can achieve shareholder value.
Visitors of a website customer retention, customer loyalty, market share —> indirect values by which we can achieve shareholder value.
We can sacrifice short-term profitability for a greater overall shareholder value. Therefore it is very important to clarify what are the direct and indirect values. In other words what are the things that really count.
WHAT ARE THE NON-NEGOTIABLE VALUES
Usually non-financial values that cannot be sacrificed for any profit or other benefit.
Example: J&J Tylenol case study.
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BIASES (IN VALUES)
Lack of explicit discussion and/or agreement on values and the tradeoffs among them.
Poorly defined values or values that cannot be meaningfully measured or projected into the future.
A focus on indirect values rather than the direct values.
Inappropriate discount rates, improper adjustments for risk, and incorrect valuation of intangibles.
SOUND REASONING
Sound reasoning, based on normative decision theory, allows us to reach clarity with confidence given the information we have.
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THE PROCESS OF SOUND REASONING
1. Present the information as a DECISION TREE
2. CLARIFY VALUES —> clarify your tradeoffs
3. CALCULATE THE EV (EXPECTED VALUE). It is a probability-weighted average of the outcomes for each branch in the tree. – clarify expected value. Because the future is uncertain we have to calculate the expected value of things.
EXAMPLE
1. Present the information as a DECISION TREE
2. CLARIFY VALUES —> clarify your tradeoffs
3. Calculate EXPECTED VALUE nad compare choices.
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FLYING BARS
A Tool for Displaying Overall Uncertainty
It shows the 10th percentile and the 90th percentile of all possible outcomes. That means there is an 80% chance that the alternative’s value will fall within that range. Value alternative while considering the range of possible value outcomes.
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SOUND REASONING IN COMPLEX DECISIONS
Decision trees can be very complex in case of a high-stake strategic decision. Decision trees can grow to enormous sizes. As the number of variables grow the human brain becomes less able to make sense of the information. That’s why we need computer models in highly complex decisions.
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RELEVANCE DIAGRAM
Used to structure a complex decision. It shows the factors considered to be relevant to a decision and indicates the linkages between factors.
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The Tornado Diagram
The Tornado Diagram
Identifies the uncertainties that have the greatest impact on each alternative’s value.
“The wider the swing in a bar, the more impact that uncertain factor has on the decision’s overall uncertainty.”
It is a useful tool to consider which piece of information has to be further examined and analysed.
COMMITMENT TO ACTION
“Without action, the value of the best alternative is nothing more than potential value. Converting potential value into real value requires action.”
What one does is what counts and not what one had the intention of doing.—Pablo Picasso
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THINKING AND DOING – TWO DIFFERENT MINDSET
Thinking about an action and actually doing it requires two different mindsets.
The shift between thinking and doing could be very difficult.
“The mindset of deciding must embrace uncertainty; the mindset of action must replace uncertainty with certitude of purpose: “Let’s get on with it.”
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WHAT IS
Conscious Commitment?
Because of the uncertainty involved in every decision we can’t be always 100% sure the outcome will be favorable.
After the decision has been made, we reached 100% on each DQ requirements now it’s the time to STEP BACK, stop worrying and let the implementers do the job.
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INCREASING COMMITMENT TO ACTION
Active participation and ownership from all stakeholders helps to take real action. For example, think about a startup entrepreneur will do whatever it takes to keep that enterprise alive and growing.
Participation and ownership could be much stronger motivators than monetary incentives.
It is highly beneficial to invite participants who are responsible for implementation, not just for planning. If people actively participated in the decision making process they will commit to the decision even in hard times.
It takes leadership skills to manage the mindset conflict between strategists and implementers.
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BIASES (IN TAKING ACTION)
Disagreement about whether a decision needs to be made at all.
Lack of agreement on the quality of the other DQ requirements.
Discomfort with the decision’s inherent uncertainty.
Hesitation in shifting from decision mode to action mode.
Failure to align with those who must implement the decision.
Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance.—Daniel Kahneman
The human mind simply isn’t wired make complex decisions in a natural, intuitive way.
Daniel Kahneman identifies two very different mental processes, he calls them SYSTEM ONE and SYSTEM TWO.
SYSTEM 1
Extremely fast, unconscious processes.
Based on the recognition of familiar context and situations, called “pattern-recognition.”
Making significant shortcuts and making decisions very quickly.
Useful in repeated in a stable environment, like driving a car, doing our morning routine, playing chess. Also extremely useful in times of sudden danger.
SYSTEM 2
Slow, rational, requires conscious effort.
We make our high-stake rational decisions using System 2.
SYSTEM 3
“Augmenting our mental process with external support is an important type of activity which the authors label as System 3.”
System one and System 2 thinking are both prone to biases.
In comlex, high-stake decisions we need more, we can’t just rely on what is in our heads.
We need external processes to support our decision making. We need: tools, processes, data, experts.
“It is a critical addition to Systems 1 and 2 when making complex decisions.”
“Mindset is all the stuff in our heads: beliefs, mental models of reality, lessons learned, memories, preferences, prejudices, and unconscious assumptions. We use these to make sense of the world and to make judgments and decisions.”
“Whenever we encounter something that conflicts with our mindset, the first impulse is to reject or attack it, as an antibody would attack an alien organism.”
The mind cannot cold conflicting ideas simultaneously.
The reason we’re doing it is we want to understand the world and have a sense of safety and certainty about our environment. We have a treshold to tolerate ambiguity, uncertainty and change.
We prefer to preserve the current situation, even if a better solution exists.
“We stubbornly cling to the current position, technology, or business strategy too strongly and for too long—and even escalate our commitment to it despite evidence that it’s not working, in the hopes that things will improve.”
Build a “learning frame” habit. —> Aknowledge you’re still learning and you don’t know all the answers to everything. This way you can still protect your mindset even if you’re wrong time to time.
Consciously seek information that contradicts your beliefs. Talk to people who hold a contrary opinion, don’t be afraid of disproving yourself.
Put decision making practices and processes in place that help you to make decisions rationally and prevent you from biases.
The MBTIÂ framework is a great tool for identifying personality-based preferences and biases-
Based on our personality we have a particular preferred approach to deal with things.
Personality is not a problem on its own. But it can create decision traps when we see the problem just from one single perspective rather than considering multiple perspectives.
For example, an Extrovert is energized by engaging in discussion with others, whereas an Introvert comes away from such discussions feeling drained.
People with a preference for Sensing seek out specific, factual information. They are skeptical of uncertain possibilities and scenarios put forth by coworkers with an iNtuition preference.
iNtuition-based thinkers usually tend to expand the frame of decisions and Sensing-based thinkers try to narrow it and keep as specific as possible.
A Feeling type prioritizes people when making decisions, a Thinking type pays more attention to technical details.
Extroverts prefer to discuss things in a group setting, introverts prefer to write things down.
Judging types tend to close the possiblilities rapidly and make a final decision as soon as possible. Perceptive types prefer to keep possibilities open.
We always try to simplify the complex reality that is around us. We don’t naturally use tools that can deal with complexity and uncertainty, such as decision trees.
We struggle to interpret complex situations when there are 4 or more unknowns. It is almost impossible for the human mind.
However, we can use augmented versions of our System 2 thinking, tools, computer models and many other things that can interpret compex problems easily.
We always oversimplify our complex reality and make sense of the world easier.
We apply selective attention to details we interpret as important and ignore the rest, because of our limited ability to deal with lots of unknown variables.
However, we often cannot know which details are important and which are note.
Example
“In situations where many value dimensions are important (such as the location, cost, size, floorplan, finishes, and state of repair of a possible new house), we still end up focusing on just a few key attributes because of our inability to combine many cues reliably.”
Being influenced by a reference point while deciding about something else.
Sales people: while shopping they tend to present the more expensive house or other item first. Creating a refference point of a higher pricen. After the more expensive items the cheaper one doesn’t seem so expensive at all.
It can be responsible for many of the social domino effects experienced today.
When two members of a group suggest something that’s contrary to the group’s decision the third member may reconsider his or her opinion regardless of his or her initial beliefs.
When a group is so confident that they are right and they close their mind when facing any new or contrary information about the situation.
Perhaps the most vivid examples are cults and extreme radicals that belive their way of seeing the world is absolutely true and disregard any discomforming information that can possibly shake their beliefs.
“As Alfred Sloan, the famous CEO who built General Motors into one of the most successful companies of the 20th century, once said: “If we are all in agreement on the decision, then I propose we postpone further discussion of this matter until our next meeting to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about.”
Starting work on a solution to the problem without careful thought. Trying to solve the problem without really understanding it.
Lack of frame control trap
When the frame is too heavily influenced by a single perspective without the consideration of others.
People realise they have to reframe the whole situation just after they experienced some kind of problem, after they’ve invested many energy into the decision making process.
Narrow framing
We humans always try to simplify the overwhelmingly complex reality that surrounds us. In order to make sense of the situation and be able to simplify the decision-making process.
Framing failures are the most common reason of low decision quality.
When we confuse agreement with a good decision. —> This must be a good choice— because we all agree.
“We have all witnessed complete agreement around utter nonsense. What we really want is agreement around a quality decision that meets the six DQ requirements.”
Groups are capable of making better decisions than individuals. However, group decisions are not always as good as we think.
That’s why it is crucially important to evaluate the quality of the decision after it has been made.
WHAT TO DO?
Use the 6 requirements of DQ consciously.
Avoid premature agreement on a decision.
Provide a safe environment for intellectual conflict in order to avoid single minded framing.
Use dialogue and testing before a decision has been reached.
Narrow framing
We humans always try to simplify the overwhelmingly complex reality that surrounds us. In order to make sense of the situation and be able to simplify the decision-making process.
Framing failures are the most common reason of low decision quality.
Strong advocacy is misinterpreted as evidence or solid and good quality decision.
2. Approval myth
“The idea that any proposed solution that is approved after intense interrogation by the approval body must be of high quality.”
The mistaken belief that a quality decision can be reached by relying on powerful advocacy and intense questioning.
“No amount of advocacy or questioning can improve a decision if the alternatives are weak, the information is unreliable, or the reasoning is unsound. Quality must be baked into the decision; it cannot be inspected in at the end.”
It can encourage unnecessary competition between individuals rather than cooperating to improve the quality of the decision.
Encourages oversimplification and cognitive distortions in order to make the most compelling case possible.
WHAT TO DO?
Uncouple people from alternatives. Not people but alternatives should compete.
Understand the inherent uncertainty in each alternative and evaluate it based on the DQ framework.
Narrow framing
We humans always try to simplify the overwhelmingly complex reality that surrounds us. In order to make sense of the situation and be able to simplify the decision-making process.
Framing failures are the most common reason of low decision quality.
It is a bias of oveconfidence. Having too much faith in our abilities.
We believe that our decisions are of much higher quality than they actually are.
“Corporate leaders are particularly susceptible to this illusion. Many believe that they were selected for leadership roles because of their natural decision-making capabilities.”
After making a decision people tend to believe they made a good decision. However, taking a decision apart to its components and assessing each component individually we can get a more accurate picture about the decision.
The decision is just as good as the weakest link in the decision chain.
HOW TO AVOID THE ILLUSION MEGABIAS?
Acknowledge that you, as a human probably don’t have as exceptional decision making skills as you believe.
Use a rational decision making framework and commit yourself to make high quality decision.
Put a system in place to assess the quality of the decision.
“The tendency to drag a problem into our comfort zone and solve the problem that we know how to solve, rather than solving the problem that actually needs to be solved.”
“What You See Is All There Is” (WYSIATI) —> view that what we have is all that’s needed to address the situation (from Daniel Kahneman)
EXAMPLE
“Imagine what happens when a group of marketing professionals with similar education and experience gets together to work on a decision. Given their common backgrounds and preference-based habits, they would quickly employ groupthink and conformity to convince themselves that their marketing skillset is just what is needed for the decision. They would collect confirming evidence and disregard any contradicting information to avoid dissonance. They would then frame the problem for others in a way that appears totally appropriate.”
WHAT TO DO?
Use System 2 and System 3 thinking tools and processes to understand the true nature of the problem.
Develop a frame that is appropriate for the decision.
