The importance of a decision making process
It’s one of those things that a lot of people talk about, but a few people do very well. As a 21st knowledge worker, taking decisions are some of the most important things we do, yet nobody speaks to us about the importance of a decision making process in school or college.
A freelance consultant, specialised in knowledge work, the right decisions can make your career. You deal with a myriad of client problems, each in a different situation.
Research has proven that humans have a myriad of biases and each of these biases plays a role while making decisions.
Two of the most successful investors in the history of wall street credit their success to rationality in decision making. All Buffet and Munger do stay rational when most people around them are irrational. They profit from other people’s irrationality for a living.
“Risk comes from not knowing what you’re doing.” -Buffet
The best research on this has by far been done by Amos Tversky and Daniel Kahneman in their bestseller ‘ Thinking Fast and Slow.’ We have a two system way of thinking, — System 1 (Thinking Fast, Autopilot), and System 2 (Thinking Slow, Intentional).
System 1 vs System 2 thinking
System 1 is the intuitive, “gut reaction” way of thinking and making decisions, System 2 is the analytical, “critical thinking” way of making decisions.
System 1 forms “first impressions” and often is the reason why we jump to conclusions. System 2 does reflection, problem-solving, and analysis.
We spend most of our time on System 1 thinking, which seeks a coherent story above all else, and often leads us to jump to conclusions.
One of the biggest problems with System 1 is that it seeks to quickly create a coherent, plausible story — an explanation for what is happening — by relying on associations and memories, pattern-matching, and assumptions. And System 1 will default to that plausible, convenient story — even if that story is based on incorrect information.
On Wikipedia, we stumble a list of more than 100 decision-making biases.
“What are the secret of success?
one word answer :”rational”
Why is the decision-making process important ?
Using a step-by-step decision-making process can help you make more deliberate, thoughtful decisions by organising relevant information and defining alternatives.
If we can’t trust our guts, then what can we trust? Many business-people put their faith in careful analysis.
To test this faith, two researchers, Dan Lovallo, a professor at the University of Sydney, and Olivier Sibony, a director of McKinsey & Company, investigated 1,048 business decisions over five years, tracking both the ways the decisions were made and the subsequent outcomes in terms of revenues, profits, and market share.
The decisions were important ones, such as whether or not to launch a new product or service, change the structure of the organization, enter a new country, or acquire another firm.
The researchers found that in making most of the decisions, the teams had conducted rigorous analysis. They’d compiled thorough financial models and assessed how investors might react to their plans.
Beyond the analysis, Lovallo and Sibony also asked the teams about their decision process—the softer, less analytical side of the decisions.
Had the team explicitly discussed what was still uncertain about the decision?
Did they include perspectives that contradicted the senior executive’s point of view?
Did they elicit participation from a range of people who had different views of the decision?
When the researchers compared whether process or analysis was more important in producing good decisions—those that increased revenues, profits, and market share—they found that “process mattered more than analysis—by a factor of six.”
Often a good process led to better analysis—for instance, by ferreting out faulty logic. But the reverse was not true: “Superb analysis is useless unless the decision process gives it a fair hearing.”
A better decision-making process substantially improves the results of the decisions, as well as the financial returns associated with them
Just because we know we have biases, doesn’t mean we can correct a bias by just being aware of it. We can still clutter it with all the other biases. A process helps solve this problem.
What is the best process to make decisions?
The only decision-making process in wide circulation is the pros-and-cons list. Though the pros and cons list is great, a Stanford research has shown that a bias for negativity can hinder the process.
We believe that most processes that we’ve seen follow a similar framework and the easiest one to remember is the PrOACT framework from the book Smart Choices. It’s one of the best non-academic books on decision making. Here are the steps in decision making that they suggest.
Work on the right decision problem. … The way you frame your decision at the outset can make all the difference.To choose well, you need to state your decision problems carefully, acknowledging their complexity and avoiding unwarranted assumptions and option-limiting prejudices. …
Specify your objectives. … A decision is a means to an end. Ask yourself what you most want to accomplish and which of your interests, values, concerns, fears, and aspirations are most relevant to achieving your goal. … Decisions with multiple objectives cannot be resolved by focusing on any one objective.
Create imaginative alternatives. … Remember: your decision can be no better than your best alternative. …
Understand the consequences. … Assessing frankly the consequences of each alternative will help you to identify those that best meet your objectives—all your objectives. …
Grapple with your tradeoffs. Because objectives frequently conflict with one another, you’ll need to strike a balance. Some of this must sometimes be sacrifices in favor of some of that. …
Clarify your uncertainties. What could happen in the future and how likely is it that it will? …
Think hard about your risk tolerance. When decisions involve uncertainties, the desired consequence may not be the one that actually results. A much-deliberated bone marrow transplant may or may not halt cancer. …
Consider linked decisions. What you decide today could influence your choices tomorrow, and your goals for tomorrow should influence your choices today. Thus many important decisions are linked over time. …
The goal is to actually make sure none of your biases are allowing you to hinder the decision-making process.
According to psychologist Daniel Kahneman, we are quick to jump to conclusions because we give too much weight to the information that’s right in front of us while failing to consider the information that’s just offstage. He called this tendency “what you see is all there is.”
By following the process, you not only analyze the options in more detail, but you also get time to see if any of your biases have crept in. If you do this with a team, then you tap into the wisdom of the team which would effectively help you see multiple points of views.