Can we make better decisions and if so how? There is a lengthy article in the May issue of Harvard Business Review that deals with decision making and its evolution. You may be forgiven if you are not up to the minute on the techniques and applications.
The article’s first sentence sets the tone and the purpose. “When we make decisions, we make mistakes.” It then points us to the current state of the art. Behavioural Economics, the offshoot of the decision theory based on “heuristics and biases.”
There have been, so far, three schools of thought in respect to decision making. The earliest traces back to Benjamin Franklin.
- Decision Analysis – the old decision tree method formalized a process that worked well enough in some situations. Define the question, describe the options, assess each. Choose the optimal answer. Von Neumann and others developed more sophisticated methods. Probability is an important part of this and in most real world problems, probability is an unknown, or at best, variable. Thus the need to review and revise.
- “Blink” Jimmie Savage and Milton Friedman, while not dismissive of the analytical approach argued that people make decision that work without knowing all the details. Their example is a master billiards player who does not know all of the mathematical formulae and the physical characteristics of the table and the balls, but can still make the shot “as if he knew.” Their belief was that people may not know with precision but they know tendencies and approximate probabilities. While flawed, for urgent decisions this works pretty well.
- Heuristics and Biases – is the best known from the work of Kahneman and Tversky. We make consistent and almost predictable mistakes in how we assess information and its meaning. We can learn to minimize the effects.
But time marches on and so does research. Newer and more complete studies of the Kahneman and Tversky material provides interesting insights. Gerd Gigerenzer, a German psychology professor, has a big group studying variations.
All good, but we face an inevitable conclusion and as addressed in the article, “When we make decisions, we make mistakes.” That does not imply that the negation works. When we make no decisions, we make no mistakes, is certainly wrong. Making no decision is a decision and few analyze it or learn from it.
In our everyday world, we know that decision making is not determinative. There are no guarantees. What we do know is that when we make a mistake we learn if we notice, and that makes future decisions a little better.
Academics and their research aside, we can never make all decisions correctly, so we should make decisions with a view to learning something when they fail. The other skill needed is to be able to determine when the decision is wrong and quit. Good managers do not make appreciably better decisions, but they stop poor decisions sooner than weak managers.
No one decision matters. Long lasting successes and short duration small losses evolve into a structure of success.
Make more decision and pay attention to outcomes.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.