People suck (dramatic pause) at decision making! The pause probably did not make it any better; Nonetheless, people are bad at making good decisions. Though the quality of a decision depends on the respective circumstances, some basic reasons, why this is the case, can be stated: fear of uncertainty, bias, heuristics, and the fact that the complexity of our current environment exceeds the capacity of our human brain.
The answer to avoiding these “pitfalls” should be obvious: not making any decisions any longer! Yeah, well… not making any decisions is also a decision… I know! That puts a lot of past decisions and behavior into perspective. Anyways, we have an alternative: making quality decisions!
What defines as quality decision? In a nutshell:
“Quality of a decision is only derived by the quality of thought and analysis that you have used in making it.”
Ronald Howard and Ali Abbas
The most important nugget – “… quality of thought and analysis…” – refers to your toolbox of decision making. The toolbox gives you the possibility of using tools that allow you to make decisions as good as possible, given the respective circumstances.
But before we can talk about different tools and how you can use them, we first must talk about what high quality decisions are. (Do not worry, we will talk about tools in a later post. To be upfront: an entire series of posts is currently under construction ;-))
With that being said, let us have a look at the first part of this post:
Different Levels of Decisions
First things first: what is a decision? Easy, right? You simply think about something (sometimes more and sometimes less hard), then you decide upon an action, and with that being done, you do it. Some examples would be: having dinner, buying a car, and changing your career in your mid-forties. As one might suspect, not all of these decisions are equally difficult to make? Lets us have a look at them:
Dinner: I know that this one is controversial and that friendships got destroyed, because it was impossible to choose between Chinese and Italian food. Some of the questions that could potentially destroy your friendships are: What are you in the mood for? Do you want to cook? What ingredients do you have at home? Do you still need to buy something? Would you rather go out? Or get your dinner delivered? How expensive is it? How long will it take to get to your place (or the other way around)? Should you order more for tomorrow? Etc.
Buying a car: Buying a car is nothing a standard person does on a daily basis. There are multiple factors that need to be considered: What do I need the car for? Should I get a new or an used one? Should it be an electrical car? How can I finance it? How long do I intend to keep it? Where do I buy it? What kind of insurance do I need? Etc.
Changing your career: This is one of those decisions you really should not make “because you felt like it”! Usually, questions such as: “What am I truly passionate about? How do I become professional in my desired occupation? Do I have to go back to university? Do I have enough money? Am I willing to move, if needs be? Etc.” arise.
What all the above decisions have in common are underlying questions, which will be either directly or indirectly answered. If you decide to stay at home, the option of going out is negated, and with that, certain restaurants will not be available for you this evening. Similarly, if you decide to buy an electric car, you usually will have to look at different vendors, in contrast to a car, which is running on fossil fuels. This means that one must cut off alternatives, in order to make a decision.
The second insight would be that there are different levels of decision making. Deciding on dinner should usually not take longer than a couple of minutes (excluding very stubborn friends). Whereas, deciding on a new car, can take hours. Changing ones career, on the other hand, is a decision which can take months, sometimes even years. The next figure demonstrates this concept:
Figure 1 is a pyramid divided into three parts. The bottom part of the pyramid is called Quick and represents quick decision making. Decisions, which fall into this category, are usually made everyday, or at least very frequently, like dinner. It should not take longer than moments or minutes to make the decision, because we can use habits, common sense, and rules of thumb.
The middle part of the pyramid is Conscious. To make a conscious decision, hours can/should be invested. To avoid decision traps such as bias, a checklist can be used.
The final part – Rigorous – focuses on rare decisions. Many resources (time, money, etc.) and people may be used/involved in making this decision. It is advised to apply a formal process to avoid as many fallacies as possible.
The levels are not equal to every person. A car dealer has to make decisions regarding cars on a daily basis. Moreover, the lines between the levels are fuzzy. Sometimes, it may make sense to use a checklist for a “quick” decision, just to be doubly sure that you did not forget anything. As stated before: it is all about the quality of thought!
Now that we have an understanding of the different levels of decisions, let us have a look at the outcomes thereof.
Decision ≠ Outcome
First, let us tackle the concept of uncertainty. For that we begin with an example mentioned in Richard Thaler’s book Misbehaving:
During a workshop the question was stated: “Would you invest in a project which has a 50% likelihood of costing you $ 250,000 or earning you $ 500,000?” This means an expected return of $ 125,000. Around half of the department heads would do that. The CEO of the company was then asked whether he would support this project and how many. He stated that he would support all of them. Thaler then pointed out that, in a real situation, the CEO would probably only receive a fraction of the project proposals; Because, the department heads were too frightened of the consequences, if the project would fail.
This story is very powerful, because it shows us how much humans hate to loose (money), that humans perceive the outcome of a decision as more important than the logic which lead to it, and that good choices will not always lead to good outcomes. Though each of these three points is worth a discussion (and they will in additional posts), we will focus on the third: why good decisions do not guarantee good outcomes and vice versa.
For that have a look at the following figure:
Figure 2 indicates that there are four different eventualities of a decision:
- Good Decision leads to Good Outcome
- Good Decision leads to Bad Outcome
- Bad Decision leads to Good Outcome
- Bad Decisions leads to Bad Outcome
Eventuality one is the big goal! We know how to make good decisions and everything went according to plan. Very well done!
Eventuality two can be summarized with the words: “simply bad luck“! You did your homework (not drinking…), put in the work (not drinking at a wedding…), and at the end, some factor, which was unforeseeable and/or not influenceable, crashed the party (that one crazy aunt…). This is annoying, for sure, and not your fault. Time to get up, dust yourself off, and tackle the next project (staying away from crazy aunts).
Similarly to eventuality two, eventuality three can be described as “plain old dumb luck“. You did not do anything and still came out lucky. Good for you and probably infuriating for a lot of your peers (designated drivers).
Eventuality four is again the way humans think it should happen: “you reap what you sow“. Did not do the work and therefore you failed.
I am well aware that this example is way too simplified, and that there are outcomes, which are not black and white; Nonetheless, it was chosen to as a first contact point to the concept of eventualities.
With the discussion of the concept of eventualities the question of how and why certain people make certain decisions, may arise. This leads us to the next part of this post:
Ways of Decision Making
In Decision Analysis there are two decision system: Affective and Deliberative.
The Affective Decision System is the “emotion” system. It is associated with the human lizard brain and is the cause for our primal emotions such as fear, hunger, and sex. If not kept in check, it would make humans behave very impulsive and only focused on immediate gratification. (I will not make a joke here, because it is way too easy!)
The Deliberative Decision System, on the other hand, is our newest upgrade to our lizard brain. Evolution added it approx. 150,000 years ago, and it allows humans to think further than the next chocolate bar. It gives us the ability to understand correlation and causation. Unfortunately, it has its limits. If we used up too much brain- and willpower, we become tired, which allows the lizard brain to jump into the spot light.
If you now think: “Sounds awfully similar to ‘Thinking Fast and Slow‘ by Daniel Kahnemann?” You are absolutely right about that one! The Affective System allows us to use shortcuts and filters in our daily live, in order to prevent us from being overstimulated. Whereas the Deliberative System, takes care of conscious decisions, which need thorough thinking. The following figure is a potential representation of how humans can make decisions using the two decision systems.
Figure 3 consists out of three ellipses, which respectively symbolize the declaration of an action in an reactive or proactive way, or the lack thereof.
The top ellipse represents the lack of a declaration of a decision, which is demonstrated by the habitual action (affective system) after a change in circumstance.
The second ellipse depicts the declaration of a decision (deliberate system), after the change in circumstance. The change leads to a conscious choice, which then leads to a chosen response.
The final ellipse is only comprised of the conscious choice and the chosen response. It portrays the proactive decision, which is made by no change in circumstance.
By understanding how humans make decisions, we will now have a look at a framework which can be used to make deliberate decisions:
The Elements of Decision Pursuits and Quality
You may have heard about descriptive and normative pursuits. The former means how things are “actually done“; Whereas, the latter refers to how things “should be done“. A good example would be the difference between Behavioral and Normative Economics. Behavioral Economics focuses on how the homo sapiens aka human does things. Its behavior is not solely driven by rationality and optimization, but rather includes biases, heuristics, and altruism (among other behavior). On the other hand, Normative Economics focuses on how the homo economicus does things. Its behavior is only driven by rationality and gaining the most bang for its buck.
Similar to Economics (because there are additional pursuits), Decision Analysis has both pursuits. The normative pursuit is used for determining optimal approaches for decision making. The descriptive pursuit focuses on describing how and why decisions are being made, and how to present e.g. normative approaches, for human to make better decisions.
A reference framework, for making normative decisions, would be the “Six Elements of Decision Quality”:
- Decision Maker: “Will I really take action?”
- Frame: “What is it that I am deciding?”
- Alternatives: “What are my choices?”
- Preferences: “What consequences do I care about?”
- Information: “What do I need to know?”
- Logical Reasoning: “Am I thinking straight about this?”
The first element – Decision Maker – is the human who makes the decision. This element heavily goes into the field of Psychology and therefore will not further be discussed.
The second element – Frame – defines the way of viewing a decision. The topics dinner, new car, and career change, which were discussed beforehand, would be examples for a frame. This elements sets the point of focus of a decision.
The third element – Alternatives – means which alternatives do you have in regards of the decision. There are two important aspects, which need to be mentioned. An alternative is only an alternative, if the decision maker has control over it. For example: stating that you could work for company ABC is not an alternative. It only becomes one, if company ABC offers you the job. Because then you can really decide whether you want to work for that company, or not. The second thing: choice paralysis is real. The more alternatives you have, the more likely it will be that you make a bad, or at least no the optimal, decision
The fourth element – Preferences – refers to the preferences the decision maker has. If the decision maker is environmentally conscious, a small, electric car for a city might be of more interest than an off-road truck. It all depends on the decision maker.
The fifth element – Information – indicates the amount of information needed and gathered for a good decision. It is important to gather enough information, but to not go overdrive and gather all the information possible. Anyone who analyzes data knows exactly what I am talking about.
The final element – Logical Reasoning – refers to the decision system used by the decision maker. This can be affective or deliberative, as well as reactive or proactive.
For a graphical representation, please have a look at the following figure:
The Decision Quality Chain is a practical and easy way to explain the interconnectivity of the Six Elements of Decision Quality. To be absolutely blunt: the quality of your decision will only be as good as the weakest link. If you have gathered too little or too much information, it will affect the other elements as well (remember: resources are limited). The key is to find a balance between all these six elements, in order to make the chain as strong as necessary!
And because nothing better can come after the Decision Quality Chain, this post will now conclude.
Conclusion
In conclusion, people suck at making decisions, and there are tools which allow humans to make good decisions. In this post a lot of information and concepts were presented. Among other things, we had a look at the different Levels of Decisions, discussed that a good decision will not always lead to a good outcome (or vice versa), and learned the Six Elements of Decision Quality. In the following posts we will have a look at different tools to learn how to make good quality decisions. So stay tuned! 🙂
If you liked this post, didn’t like it, and/or have a book recommendation, please leave a comment, subscribe to the blog, and share this post. I am always happy to learn new things and improve myself.
DISCLAIMER: The visualizations presented in this graph do NOT represent quantitative data. They are merely used for argumentation purposes and therefore are not scientifically sound! For more information & a good laugh, have a look at the book Calling Bullshit by Bergstrom & West, Chapter 7: Data Visualization.
ADDITIONAL DISCLAIMER: In this post I heavily used materials from the first chapter of the book “Foundations of Decision Analysis” by Howard & Abbas.
One thought on “Would you like Quality to your Decision Making?”
Comments are closed.