We are faced with the need to make decisions every day. Should we bring product A or B to market? Which marketing strategy should we use? Of the choices that we have available, who is the best person to hire or who would make the best partner?
In each case, we try to rely on as many facts as we can so that we can make a reasonable estimation of the best path to follow. At first glance, the approach of weighing the evidence rationally seems perfectly reasonable.
Yet, in so many instances, rational predictions fail. Why is that? And what can we do about it?
The flaws of rational thinking
Rational thinking is prone to several biases and problems.
Daniel Kahneman, who won a Nobel Prize in economics for his work on cognitive biases, points out that a team that has fallen in love with its theories may unconsciously ignore or reject contradictory evidence, place too much weight on one piece of data, or make faulty comparisons to another business case that suits its bias.
He points out that a McKinsey study of more than 1 000 business investments showed that when companies worked to reduce the effects of bias, they raised their returns on investment by seven percentage points.
He provides a checklist of 12 questions to detect and reduce bias, one of which is ‘Has the team involved fallen in love with their decision?’ The first step, then, is to use a checklist to minimise decision biases, much like the one suggested by Kahneman (see box on the next spread).
And then there are psychological traps
John Hammond points out how we may fall into the confirming evidence trap (seeking out evidence that justifies our choices rather than looking at the whole picture), the status quo trap (shifting deck chairs on the Titanic rather than jumping over while it is sinking) or the sunk cost trap (throwing good money after bad in the hope of recovering initial losses rather than simply cutting bait before we are completely drained).
A recent client of mine is a good example of the latter, having continued to invest his money in developing a technology despite being aware of a superior competitive product that reached the market before his development was complete.
Acting on your awareness is a critical step. And acting sooner rather than later may actually save the day.
Trial & Error is not foolproof
Another problem with rational thinking is that of ‘trial and error,’ as suggested by Karl Popper. He believed that no decision could be considered correct unless it is subject to testing and scrutiny in order to accept or reject it.
Once again, this would appear to be a rational and scientific approach to decision-making, but recent critiques point out that people making decisions are inherently subjective and decisions are influenced by each person’s own values, so that even how we implement a strategy may be influenced by what we believe.
You could, for example, choose to believe that most businesses fail (and that would be true), and as a result, never pursue success in business.
Managing subjectivity
This would clearly not serve you if your business idea were more like one of the exceptions. For managing the subjective nature of people when making decisions, R.J. Ormerod has suggested that there are three things that you can do:
- Use a two-tiered approach with a small group of core people who set the standards that a larger group can implement with autonomy but within those standards.
- Tap into as much knowledge within the organisation as you can.
- Ensure that those carrying out the decisions are involved in making them, and take into account a wide variety of views prior to setting the context (involving those responsible for taking the decision, those who have to implement it, those affected by it but are not involved, and those who can offer expertise on some aspect or other). For example, key management, sales, customers and other experts should be involved.
Induction flaw
Yet another example of ‘pseudo-rationalism’ is induction, a commonly used ‘rational’ technique of basing future decisions on the past, the problems of which have been outlined by David Hume. Just because two things always seem to occur at the same time does not imply that they always will.
Our past experiences create brain patterns that unconsciously steer our attention to things selectively. For example, you may think that your online marketing efforts always fail because they are not structured within a campaign, even if you observe this repeatedly.
However, it may simply be that your brain pattern of expected failure limits all future efforts. In this case, you have to change your expectation, not your marketing strategy.
Therefore, when faced with evidence from the past, try reversing your cause-and-effect thinking. Is your marketing strategy impacting your success, or is your prior lack of success impacting your marketing savvy?
The trick to better decision-making
To remember this advice for making better decisions, I suggest the mnemonic TRICK:
- Two-tiered approach
- Rapport with strategic team and implementers
- Involve all from management to customer
- Cause-and-effect reversal
- Use the Kahneman perspective
This five-step approach can allow you to implement plans with a perspective that is much more aligned with how the brain really works than a simple ‘rational’ (or ‘pseudo-rational’) approach.
