How to Make Better Decisions

Every business owner has to make tough decisions with uncertain outcomes. That is the nature of the job, and it is as true today as it was thirty years ago. But there are two big differences between decision making then and decision making today.

Change happens faster and on a larger scale than in the past

First of all, information flows much faster today. Thanks to Twitter, Facebook, YouTube, and other social media, news that took days or weeks to propagate around the globe thirty years ago, now requires mere minutes. And once that information is released, people come to conclusions and react to it faster than ever before. In addition, the volume of information stored and processed today vastly exceeds anything even imagined thirty years ago. But often that data comes with a price: inaccuracies, inconsistencies, and lots of room for interpretation. More data usually leads to more questions.

Data overload leads to bad decision making

The overwhelming amount of data — flowing at faster and faster rates from more and more sources — often leads to poor decision making or indecision. The impact of those decisions is, to a certain extent, a function of business size. Large businesses have more checks and balances, and more resources, than small businesses, but they also generally have deeper cash reserves, greater access to capital, and more inertia. The end result is that small businesses are much less resilient than larger businesses. A few moderately bad decisions can easily destroy a small business, whereas giant multi-nationals often withstand billion dollar blunders and still come back.

Overcome bias to make better decisions

Most people act fairly rationally, at least when it comes to business. That is certainly what we were all taught in business school. The theory is that most people will act in their own self-interest, and make careful decisions based on all of the available facts. If they hear about an offer that “sounds too good to be true”, they won’t fall for it. Right?

If something looks too good to be true …

The reality, of course, is that people often do stupid things. They make poor decisions based on incomplete or inconclusive data, hunches, superstitions, or other deep-seated beliefs that don’t necessarily mesh with reality. Hundreds of thousands of people invested in timeshares long after it became clear that they were rarely a good investment.

After Hurricane Katrina, tens of thousands of people moved back into the most dangerous areas and rebuilt their homes, despite ample evidence that their homes would probably be destroyed again by an even worse storm. Bernie Madoff swindled hundreds of millions of dollars out of actors, celebrities and business executives, and many others — most of whom should have known better. They all understood that no investment can keep generating above-market returns year after year after year with no letup. But they invested anyway. And to compound the problem, many of these victims invested very large sums of money, so when Madoff’s scam collapsed, a lot of people weren’t just hurt a bit, they were wiped out.

These are just a few obvious examples of how people fool themselves. You don’t have to look far to see countless others. Just watch a few episodes of American Greed. Some of the scams are very clever, but a lot of them seem so obvious that is hard to believe these guys could get away with it. But they do, time, after time, after time.

Confirmation bias – get out of the echo chamber

One way people fool themselves is through “confirmation bias” — once they believe something is true, they seek out evidence that supports their belief and discount evidence that says otherwise. We all do it. It seems to be hardwired into the human brain. But you can fight the urge, and if you really want to succeed in business, you’ll have to.

One way to fight confirmation bias is to gather information from a variety of disparate sources. Another is to interact with people who don’t always agree with you. Abraham Lincoln famously surrounded himself with a “team of rivals” who challenged his thinking on a wide range of issues.

On the other hand, Lyndon Johnson and Richard Nixon, two Presidents tarnished by bad decisions during the Vietnam war, surrounded themselves with people who told them what they wanted to hear.

Anchoring bias – keep an open mind to new information

Another way people fool themselves is through “anchoring bias”, the tendency to give too much weight to data you receive very early in your decision making process.  An example is when someone wants to sell a used car. The seller will often start with a high price, to set an anchor so any future prices look very reasonable compared to the initial one. In this case the anchor is useful, at least for the seller, who is trying to maximize his sales price.

Examples of bad business decisions

Examples aren’t hard to find: Coca Cola’s roll out of “New Coke”, the disastrous BP oil spill in the Gulf, Microsoft’s refusal to believe the Internet was a threat (first with Netscape, then later with Google), GM’s thirty year focus on lobbying and marketing instead of innovation and customer service, etc. Each of these companies came back, sometimes seemingly from the dead.

Tips to improve decision making skills

Given the heightened importance of good decision making, what can small business owners do to improve the quality and consistency of their decisions? Here are a few suggestions.

Keep track of what is going on in your industry

You can’t consistently make good decisions if you don’t know the facts. Subscribe to industry news sources, regularly read the business section of one or two major newspapers, and attend major industry conferences or trade shows.

Expect the unexpected

No matter how much analysis and planning you do, you cannot predict the future. Things happen. So your plans should be flexible enough that you can adapt to the unexpected, without throwing everything off course.

Focus on what really matters

Deciding what matters cannot be a casual decision; it has to be thought through carefully, and it should align with your company’s strategy (you do have a strategic plan don’t you? It doesn’t have to be 200 pages, but you do need something.) The design of the new office furniture is probably not critical to your company’s survival, but responding appropriately to your largest customer’s flaming review on Twitter probably is. Also remember that if everything is a priority, then nothing is.

Avoid isolation

Don’t fall into the trap of relying exclusively on a few trusted insiders to get your facts. Talk to customers, vendors, partners, suppliers, and even competitors. Force yourself to get outside your comfort zone once in a while.

Seek out help when you get in over your head.

If you think you know everything, you are doomed to fail. If you don’t have the time or resources to delve into a particular issue, or don’t have the technical background, or just want a second opinion, then by all means bring in outside experts to help you.

Of course, in the real world everyone has some sort of bias, and no one is completely independent. But you can get pretty close to that ideal if you are careful.

Be decisive, but not hyper-reactive.

This is probably the hardest of all. You don’t want to over-react and make a bad situation worse. But then again, you don’t want to hold back and over-analyze every possible contingency to the point that you miss the boat.

Everybody makes mistakes, and no matter how hard you try, you will probably end up doing something over the next year that leaves you scratching your head five years from now. But you might be able to limit the damage by and following some of the suggestions provided here.