MAKING DECISIONS IS a vital skill for any leader or manager. While some may be small or marginal decisions, getting others wrong can have more serious consequences for your business.
Decisions invariable involve an element of uncertainty, but most managers take similar approaches when faced with this uncertainty: they seek more information; they kick to touch; they simply put off making the decision.
Meanwhile, success relies on managers’ ability to make good decisions in the face of that very uncertainty.
So how good are people at making decisions under uncertainty? Studies show that decision-making can be surprisingly inconsistent.
In one study, radiologists were shown a number of x-rays in sequence, some of which were identical. About 20% of the time, when faced with identical x-rays later in the sequence, the radiologists did not reach the same diagnosis as they had earlier.
This inability to make consistent decisions is not confined to the world of medicine. Daniel Kahneman, who won the Nobel Prize for his work on the psychology of judgement and decision-making, often speaks of his surprise at the level of “really poor thinking” in large organisations that one would assume to be highly rational.
He talks of his experience at one large insurance firm where insurance valuations could vary between 40 and 60% depending on the individual reviewing the case, even though they were looking at precisely the same information. This was true irrespective of their years of experience.
And experience doesn’t seem to help much, for two reasons. One is that our typical decision-making processes are prone to fundamental psychological biases. And secondly, most people are not used to reasoning in an explicitly statistical manner.
If experts and experienced professionals find it difficult to make consistently good decisions, then what hope for the rest of us? To answer that, let’s first define what a ‘good’ decision is.
What does a good decision look like?
The exact definition of a good decision is likely to vary from business to business, but there are some basic principles that can help a manager differentiate between good and bad decision-makers.
Better than chance
A good decision-maker should be able to predict the likelihood of an outcome with greater accuracy than a computer programme designed to guess randomly.
For example, an analyst should be able to correctly identify whether or not the company should open a new branch in a certain area with more accuracy than someone simply flipping a coin.
Consistency and discrimination
Good decision-makers should make similar judgements if cases are alike and dissimilar judgments when cases are not alike.
Good decisions are executable and can be acted upon. If a ‘decision’ is made but no one is sure what to do next, then you may not actually have made a decision.
Making Better Decisions
So if experts and experienced professionals struggle with making consistent accurate decisions due to psychological biases and flawed non-statistical thinking, can you actually improve your decision-making? The short answer is yes.
Thankfully there are a number of tools which can help leaders make better decisions in different areas.
Build a decision aid
Comparing multiple options with different features can be a difficult task. If your business is faced with making choices between multiple different suppliers each quarter, it may be worthwhile building a comparison tool or calculator.
The idea is to build something similar to Bonkers.ie, a website which helps consumers compare broadband and other products to find the best deals. This would allow your purchasing managers to compare multiple suppliers more easily.
A fantastic online resource for creating your own multiple comparison decision aid is meenymo.com.
It has a wide range of templates and allows you to create your own decision tool to help you make trade offs between different characteristics that might be important to your business in a particular decision, for example, a three-way trade-off between price, quality and delivery time.
Flow charts can help to improve the consistency of decisions in large teams or across departments. They are diagrams that show the decision maker what to do next based on the decision they have just made. An example can be seen here.
They are most useful when there is a clear process for determining good consistent decisions.
Keep a decision journal – and measure your results
This is a low-cost but effective way of improving your decision-making. The idea is relatively simple: when you are making an important decision, think for a moment, make a decision, write down what you expect to happen as a result of your decision and why you expect it to happen.
Then, every quarter, review your decision journal and compare your reasoning and predictions against what really happened. Over time, you will start to gain insight into the patterns in your thinking and you will have an honest idea of how effective your decision-making is.
If you want to make your decision journal even more effective, keep track of other factors that might be impacting your decision-making such as your location, your emotional state and whether you have just had a win or a loss in your business.
Reviewing your journal honestly will also ward against two potential psychological biases – egocentric bias and hindsight bias.
We tend to remember more readily some of the great decisions we have made in the past. We may find it a little harder to think of the less good decisions.
Egocentric bias often leads us to remember past events in a more self-serving manner, while hindsight bias leads us to believe that, after an event has occurred, we knew it would happen all along. This can make it difficult to learn from mistakes.
This is why it could be so valuable to start measuring the quality of decision-making in your business.
Donal Cronin is a director at Carr Communications, which recently launched a behavioural economics and sciences unit.
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