Published in UT San Diego, May 18, 2015
What were you thinking?
This is the phrase that appears most frequently shortly after disaster strikes based on a ruinous, idiotic decision. And of course, most of the time, the answer is, “I wasn’t really thinking at all.”
I am a passionate student of rational man (and woman) behavior, and so today we are going to revisit the subject and review a few techniques for not totally lousing up the next decision you have to make.
All employees from CEO to secretary commit preventable mistakes. The problem is that it is very difficult to rewire the human brain — but what is possible is to re-architect the environment.
Once again, we turn to my pal, Daniel Kahneman and his book “Thinking, Fast and Slow,” and two Harvard Business School professors, John Beshears and Francesca Gino.
There are two ways of making decisions, and they are called System 1 and System 2. In a nutshell, the first is intuitive, rapid, emotional and instinctive. The second one is slow, logical and deliberate.
Each has distinct advantages if used correctly. For example, if the car in front of you stops suddenly, you do not need to convene a conference with your passengers to discuss the merits of hitting the brakes. But when it comes to hiring and firing people, that is a car of a different make.
Recently, I was facing a tough decision on a CEO hire. And I was sure I was right to take a certain action. But System 2 kicked in and I changed my mind. And I was right to change my mind.
The theme here is to have patience and allow for new data — don’t make the decision until you have to. New information appeared, and I was spared making a significant mistake.
The issue around new data is that it shows up when it shows up, and sometimes the leader looks like he is arbitrarily changing his mind. Kahneman would caution us against confirmation bias, meaning we tend to find data that confirms what we think already — and in so doing we close out the possibility of new data influencing us.
I race a sailboat, and my analogy is this. When the wind shifts, I tack the boat. Now sometimes the crew screams expletives, (they do not always have time to get ready) but there is new data (a different wind direction) and we need to acknowledge and embrace what the wind gods have given us.
When you apply this thinking in a business setting, your employees can often think you change your mind too quickly since people like certainty, but when there is new data, you need to react.
One way to improve decision-making is to break any decision down into smaller pieces. Gino and Beshears argue for “narrowly defining the problem.” Our human brain can make a lot of little decisions, but one big one can blow the circuit. You can’t eat the whole elephant at one sitting.
We all have biases. For example, I do not like green peppers. But here are some significant biases that you might consider. Numero uno is excessive optimism. I have never seen a spreadsheet that shows less than $50 million in revenue in year five (I think this must be a mantra from business plan competitions starting in the Pleistocene era). And the number of companies that hit that mark in year five is as scarce as the dinosaurs that roamed Earth then. (Note: Optimism’s partner in crime is overconfidence. Enough said.)
Next is groupthink. This one is obvious, of course — we all agree.
The next one informs the entire world of investing — loss aversion. The pain we feel when we have losses is much greater than the joy we feel when we have gains. Its marriage partner is sunk-cost fallacy. Ride it to the bottom because of course “it has to come back.”
My partner and I did our monthly investment review of the dogs in our kennel. We concluded that one of them needed to die. Over the side, into the deep, goodbye. But even though two of our dogs are funded and up over six times, it still was a hard time to face reality. Finally, we bought two bags of kibble and went back to work.
Rule No. 414
To quote the Baha Men, “who let the dogs out.”