Making Effective Decisions
Executives do many things in addition to making decisions. But only executives make decisions. The first managerial skill is, therefore, the making of effective decisions
- Peter Drucker
In recent corporate history, if there is one organization that is acknowledged for its strengths in decision making, it is Amazon. Amazon has a track record of making effective long-range decisions, as well as remarkable agility in decision making. Founder and CEO Jeff Bezos believes that rather than trying to power through a large number of decisions, executives must focus on only a few high quality decisions.
Types of Decisions
One way of ensuring high quality decision, is to not treat all decisions similarly. Bezos classifies decisions into two types :
According to Bezos, when it comes to taking decisions, many organizations fall into the “one-size-fits-all” trap. Some organizations, especially large ones, tend to apply a rigorous and data intensive process, best suited for Type 1 decisions, to all decisions. The result, according to Bezos is “slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently, diminished invention”
At the other extreme, companies to tend to use overly simplified processes and shortcuts to all decisions, including Type 1 decisions that require more deliberation. While this might make things go faster, chances are that this is a faster path to extinction.
Jeff Bezos was by no means the first to talk about matching decision making process to decision type. Peter Drucker, in his classic 1967 article on decision making , speaks of four types of decisions :
According to Drucker,
All events but the truly unique require a generic solution. They require a rule, a policy, or a principle. Once the right principle has been developed, all manifestations of the same generic situation can be handled pragmatically—that is, by adaptation of the rule to the concrete circumstances of the case. Truly unique events, however, must be treated individually. The executive cannot develop rules for the exceptional.
Philip Rosenzweig suggests an updated classification of decisions - one based on the Control (degree of influence on actions or outcomes) and Performance ( whether success is measured in absolute or relative/competitive terms). This classification (also) results in the following four types of decisions.
Depending on the type of decision, you need different approaches. For decisions where you have to make a choice without significant influence on outcomes,the key is to take “rational” decisions, making the best of the information available. Here, becoming aware of, and addressing our cognitive biases and mental models, can help us take better decisions. This also applies to decisions where you can influence outcomes - biases can come in the way of making good (realistic) estimates. For the third type of decision, where the measure of success is relative, and competitive dynamics influence the outcome, applying game-theory principles can help make better decisions.
Strategic decisions, where you have a fair amount of influence, but outcomes are also subject to competitive dynamics, are the ones which are the most complex, as well as the most consequential. The complexity makes analysis difficult, but essential. The element of competition also makes game theory relevant, albeit in a limited way, because unlike in game theory, players in real life are not bounded by fixed rules. In these situations, optimism and self-belief can push us to invest resources beyond what rational analysis would suggest, which help us perform better in a competitive environment, and make breakthroughs possible.
Structured Decision Making Process
Most of the strategic decisions that have a significant impact, require a lot of analysis and deliberation, and involve balancing a number of considerations. While some of these decisions can be “quality checked”, in most cases, the way to ensure better decisions is to ensure a good process is in place. One such process is the Mediating Assessments Protocol, which draws heavily on research and experience in hiring people.
The key elements that make this approach robust and useful are :
By adding structure and discipline, and addressing known cognitive biases, the MAP is an effective way of bringing quality assurance to complex decisions. MAP is easy to learn, does not involve much additional work, and most importantly, allows leaders to exercise intuitive judgment when required - but only after all the information is considered, and with some delay built-in.
Concluding Thoughts
As leaders, we shape reality through our decisions. Our decisions determine outcomes for the organization and for ourselves. While making the right decision every time may be elusive, we can significantly improve our batting average by following some sound principles and by applying a structured process, to overcome our biases, and make the best use of all the information at our disposal.