The boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and woman are not passive before nature. By understanding risk, measuring it, and weighing its consequences, risk-taking can be converted into one of the prime catalysts that drive modern Western society. By making high-quality decisions that reduce risk, societies have been transformed and allowed economic growth, improved quality of life, and technological progress. Thus mastery of statistics and decision theory are critical competencies to growing a company through development of new products. Utilizing the best-practices of this Compendium also improves decision quality and risk reduction.
Elements Needed to Make a Good Decision
If growth is a driver and an enabler of innovation and successful businesses, then decision quality is an obstacle. New products have to be funded in order to become commercial. The decision on how much risk to accept in moving forward is always difficult.
The right way to make decisions often violates a person’s natural inclinations. Good decision-makers have learned that what they know, even about a field in which they are recognized experts, is often wrong. As Ron van Beaumont, head of senior management training at Royal Dutch Shell put it, “our executives have to learn when to distrust their own judgments.”
The key elements of an excellent decision-making process can be broken down into four main parts. Every good decision-maker must, consciously or unconsciously, go through each of them. They are:
1. Framing: structuring the question. This means defining what must be decided. Determining in a preliminary way what criteria would cause you to prefer one option over the other. In framing, good decision-makers think about the viewpoint from which they and others will look at the issue and decide which aspects they consider important in which they do not. Framing inevitably simplifies the world which on the one hand is a good thing, but on the other, this viewpoint pushes other aspects of the issue to the background. Without proper framing the likelihood of a good decision is low.
2. Gathering intelligence: Seeking both the knowable facts and reasonable estimates of the unknowable that you will need to make the decision. Good decision-makers manage intelligence gathering with a deliberate effort to avoid overconfidence in what they currently believe, and the tendency to seek information that confirms their biases. As Will Rogers said, “it’s not what we don’t know that causes trouble. It’s what we know that ain’t so.”
3. Coming to conclusions: Sound framing and good intelligence don’t guarantee a wise decision. People cannot consistently make good judgments using seat-of-the-pants judgment alone, even with excellent data in front of them. The systematic approach forces you to examine many aspects and often leads to better decisions than hours of unorganized thinking would. Numerous studies have shown that novices and professionals alike make more accurate judgments when they follow systematic decision-making rules than when they rely on intuitive judgment alone.
4. Learning from feedback: Everyone needs to establish a system for learning from the results of past decisions. This usually means keeping track of what you expect would happen, systematically guarding against self-preserving explanations, and making sure you review the lessons your feedback has produced the next time a similar decision comes along. Ray Dalio, referenced elsewhere in this Compendium, has just taken this decision-making process to the extreme with excellent results.