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on decisions

Decision making is such an important part of business life.  Unfortunately, the human brain is not particularly well designed for making modern business decisions.  What worked well on the Serengetti plains several million years ago can create problems for us today.  There is a substantial body of research in psychology and behavioural economics which highlights these flaws.  Amongst other things, we are programmed to feel overconfident; we tend to treat $10m differently from ten lots of one million; we treat sunk costs differently from new money; we have an innate preference for the status quo; we tend to anchor our expectations of the future on the present; we tend to go with the herd; we often think we have consensus when none exists.

What can be done to avoid these pitfalls?  The key is to have a robust decision process.  Here are a few simple guidelines. 

·                  Always start by carefully defining the problem.  (You would probably be amazed how many people don’t do this and end up answering the wrong problem.) 

·                  Next define the objectives.  What would success look like? 

·                  Only then should you list the alternatives.  After “not defining the problem”, the most common mistake is to start with a given set of alternatives, and then be limited by that set.

·                  Evaluate each of the alternatives against the objectives.  A “pro’s and con’s” list only works for very simple problems. For complicated decision problems, the human brain will definitely need some help to keep all of the pieces in perspective.  Where you have multiple objectives, you will need to be specific about how you will trade off one against the other.

·                  Usually at this stage of the process it is worth going back to see if there are any other objectives that need to be considered or if there are any other alternatives.  Iterate as often as it is useful.

·                  Combine the evaluations and the trade offs to come to a final decision.

In doing all of this, try to keep a visual representation of the problem where everyone can see it.  It helps keep the group focused on the problem, not on each other.

For important or complex decisions, it is worth having a facilitator to guide people through the process.  At PS2, we have expertise at guiding groups through a wide range of decision problems, including strategy decisions, resource allocation decisions and option selection decisions.