Six Simple Lessons to Improve Your Decisions
Executives can improve their decision-making skills by applying simple techniques and becoming aware of common challenges
The Bottom Line
When making decisions, consider past outcomes, extreme scenarios, confirmation bias, analysis paralysis, sunk cost fallacy and anchoring to evaluate outcomes accurately. Productive use of these concepts will make them second nature and lead to better decisions.
Executives can improve their decision-making skills by applying simple techniques and becoming aware of common challenges. This article covers six lessons I have learned throughout my career. They have helped me make better decisions and evaluate outcomes more accurately. These concepts are simple to use and can help anyone.
01 Never evaluate decisions solely by their results.
As business managers, we usually evaluate decisions based on their results. Good decisions always lead to good outcomes and vice versa. This approach appears reasonable, and we see daily examples of this in the media. In reality, this approach is simplistic and often leads to wrong conclusions.
In the Great Recession (2007–2009), a friend’s construction business in South Florida ran into trouble and, despite his best efforts, ultimately failed. He blamed his decisions unjustly for this outcome. In reality, he did all the right things. The company went bankrupt due to harsh economic conditions beyond his control.
Evaluate past decisions based on the information you had when making the decision. This information includes your situation, market conditions and chances of success. This last point is important. No decision has a 100% chance of success. Seasoned managers know that good decisions sometimes have bad outcomes.
02 Facing a difficult decision? Consider the extremes.
A good way to handle a difficult decision is to evaluate the extreme cases. Consider the options and outcomes at the extremes. How likely are they? What perspectives do they bring? Looking at the extremes helps you understand the situation better. It also ensures you know the range of consequences of the decision.
The decision to add a new product to our portfolio is complex and time-consuming. We improved our decision-making by evaluating the best- and worst-case scenarios early on. As a result of assessing extremes, we filtered bad options quickly, cut our time to market and deployed only the products with the highest upside.
03 Beware of confirmation bias.
Confirmation bias is the tendency we have to search for and interpret information in a way that confirms our existing beliefs. It’s easy to see how this practice can lead to bad decisions.
This problem is serious when it affects executives making critical decisions for the company. There is no easy way to fix this. Always research opposing views, and see how they could be right. Make a final decision only when you understand both sides well.
04 Information is valuable only if it affects your decision.
Some managers, myself included, like to get as much information as possible before making an important decision. This strategy seems sensible and should lead to an informed decision.
The problem is that we often over-analyze information before making a decision. This habit is commonly called “paralysis by analysis” and often leads to delays and indecisiveness, not better decisions.
To improve decision-making, I filter out information that appears relevant but doesn’t affect the decision. Ask yourself, “How much would I pay for this information?” The answer tells you its value. This technique helps you focus on relevant facts, which improves decision quality.
05 Beware of the “sunk cost fallacy.”
The sunk cost fallacy affects us when deciding whether to continue or abandon a project. This one is very familiar because I was often guilty of making this mistake early in my career.
Consider a team that has completed 65% of an important project for your company. However, market conditions change, and the project no longer has the payoff you expected. Should you stop the project or finish it?
Most executives will likely choose to finish the project. After all, the team has already invested substantial time and resources. Stopping the project seems like wasting resources. However, the money, time and effort you have invested are “sunk costs,” which can’t be recovered. Consequently, they should not affect your decision.
The correct course of action is to continue the project only if it makes business sense. If the project no longer makes sense, consider stopping or changing it. Sunk costs should not factor into the decision.
06 Anchoring can work against you.
Most managers have heard of “anchoring” as it applies to sales. Salespeople often start negotiations with a high price to “anchor” it. This strategy supposedly forces clients to negotiate based on an already high price.
However, anchoring is a broader concept, best defined as a desired outcome that has significance only to you. It can lead to tunnel vision. Anchoring is not only related to numbers. Managers often anchor their expectations on specific outcomes. You see this situation when managers focus on achieving unrealistic objectives.
Consider this costly example. Some years ago, a client wanted to sell their construction business. He determined a price he thought was fair and put the business on the market. From his perspective, this price accounted for all his time and effort in building the company. But the price was unrealistically high and did not reflect the market reality. However, the price was well anchored in his mind as “fair.” The owner declined several reasonable offers below his expected fair price. Meanwhile, the market kept changing. It took him a few years to sell the business. The final sale offer was lower than the initial offers he declined.
Putting these ideas into practice
In my experience, awareness of these concepts is often enough to use them productively. After some use, they become second nature. I never think about these techniques; they just come to mind. For example, whenever I run into a project that drags on, I immediately ask myself if I am facing a sunk cost fallacy, which helps me decide whether to continue.