By: Erik Larson
Managers make about three billion decisions each year, and almost all of them can be made better. The stakes for doing so are real: decisions are the most powerful tool managers have for getting things done. Setting goals (another tool) is aspirational but making decisions actually drives action. Our research has shown that people usually do what they decide to do. The good news is that there are ways to consistently make better decisions by using practices and technologies based on behavioral economics.
In a three-month study of 100 managers, we found that managers who made decisions using best practices achieved their expected results 90% of the time, and 40% of them exceeded expectations. (For comparison, goal-setting best practices helped managers achieve expected results only 30% of the time.) Other studies have shown that effective decision-making practices increase the number of good business decisions six fold and cut failure rates nearly in half.
But although there’s great potential for using best practices to improve decision making, many organizations are not doing it. In a study of 500 managers and executives, we found that only 2% regularly apply best practices when making decisions, and few companies have systems in place to measure and improve decision making over time.
To close the gap between potential and practice, it’s important to know why it’s there at all.
One reason is history. Decision making in business has long been more art than science. In part, that is because most managers had relatively little access to accurate information until recently. Few decision tools are widely used; the pros-and-cons list, popularized by Benjamin Franklin, is probably the most common — and it’s nearly 250 years old. And then there is the unfortunate circumstance that economics in the twentieth century was based on the theory that people make rational choices when given good information, a theory proved to be somewhere between spotty and completely wrong thanks to a revolution in behavioral economics, led by Nobel Prize winner Daniel Kahneman.
That leads to the next reason: psychology. The reality is that we are predictably irrational. Behavioral economists have uncovered a range of mental shortcuts and cognitive biases that distort our perceptions and hide better choices from us. Most business decisions are collaborative, which mean groupthink and consensus work to compound our individual biases. Further, most business decisions are made under the stress of high uncertainty, so we often rely on gut feelings and intuition to reduce our mental discomfort. Decisions are hard work; there is a strong emotional impetus to just make them and move on.
A final reason is technology. Enterprise software has automated many managerial tasks over the past 40 years. That shift has formed a foundation for better decision making, but it leaves the job unfinished. Behavioral economics shows that providing more complex and ambiguous information does little to help managers and their teams with the main challenges they must overcome to make better decisions. As a result, businesses can’t see dramatic improvements in decision making by simply implementing more big data analytics software from the likes of SAP, Oracle, IBM, and Sales force.
So what can be done?
During product development of Cloverpop, our cloud solution for applying behavioral economics to decision making, we performed hundreds of experiments with tens of thousands of decision makers. We found that the most successful decision-making approach boils down to a simple checklist. But it’s important to note that understanding the items in the list is not enough; this checklist must be used to be effective, since our biases don’t go away just because we know they are there. So each time you face a decision, use these steps as a tool to counteract your biases:
- Write down five pre-existing company goals or priorities that will be impacted by the decision. Focusing on what is important will help you avoid the rationalization trap of making up reasons for your choices after the fact.
- Write down at least three, but ideally four or more, realistic alternatives. It might take a little effort and creativity, but no other practice improves decisions more than expanding your choices.
- Write down the most important information you are missing. We risk ignoring what we don’t know because we are distracted by what we do know, especially in today’s information-rich businesses.
- Write down the impact your decision will have one year in the future. Telling a brief story of the expected outcome of the decision will help you identify similar scenarios that can provide useful perspective.
- Involve a team of at least two but no more than six stakeholders. Getting more perspectives reduces your bias and increases buy-in— but bigger groups have diminishing returns.
- Write down what was decided, as well as why and how much the team supports the decision. Writing these things down increases commitment and establishes a basis to measure the results of the decision.
- Schedule a decision follow-up in one to two months. We often forget to check in when decisions are going poorly, missing the opportunity to make corrections and learn from what’s happened.
Our research has found that managers who regularly follow the seven steps above save an average of 10 hours of discussion, decide 10 days faster, and improve the outcomes of their decisions by 20%.
We need a new, scalable approach to managing decision performance. It must replace the historical theory of rational choice. It must acknowledge that our psychology often leads us astray. And it must use simple, friendly tools like this one, designed to have an outsize impact on how managers and teams make decisions.
Source: Harvard Business Review
