Do You Make Good Decisions?

Every time I am invited to speak on leadership, I allude that the crux of leadership is decision-making. The best leaders always make great decisions.
Andrew Groove made a big risky decision to move out of memory chips and focus Intel on microprocessors. Jack Welch made numerous bold, somewhat “crazy” decisions early on in his tenure as CEO at GE which resulted in its amazing growth story.

Walk through the life of any great leader and you will find that the outcome of their critical decisions made or broke their organisation. However, if you study people, you will find that on the majority, people make really bad decisions. People make bad decisions about relationships, money and health all the time.

Lovallo and Sibony surveyed 2,207 different business decisions and found that bad decisions were as frequent as good ones. We all make bad decisions from time to time.

Why leaders fail?

Bad decisions are generally the reason why leaders fail. Leadership and decision-making are intertwined. Leaders rise to the top primarily for their ability to consistently make good decisions. And usually, their fall from grace hinges on one bad decision which possibly got compounded by more bad decisions made to mitigate this one bad decision. Leaders are only as good as their last decision.

Lovallo and Sibony’s study concluded that bad decisions are made not because of lack of analysis (most of the bad decisions had sound analysis) but because of a bad decision-making process. They cited that “process mattered more than analysis by a factor of six.” Most of the time, we have data overload before we make decisions. Yet, these decisions may not be good ones. Let me start with my favourite reason why leaders make bad decisions – assumptions!

Bad assumptions = Bad decisions

A few months ago, I had lunch with Sanjeev Nanavati, CEO of Citibank Malaysia. Sanjeev is a fascinating leader. Although he has worked in various countries including the United States and is extremely experienced, he has a child-like curiosity and displays this by constantly asking questions. I am equally inquisitive and our lunch discussion started to move into a discussion of assumptions.

Sanjeev started telling me a story of his two kids. (Great story-telling skills are another important part of great leaders – but that’s for another article!)
His story involved him asking both his children a simple math question. He obtained two very different answers. The question was simply this: If Mary had read 10 books and John had read five books, how many books would John have to read to catch up with Mary? Sounds simple enough. His older child quickly answered five books.

Most of us would clap and applaud the young kid for his mathematical prowess. His younger child started thinking and then looked up to her dad and said

“John will never catch up with Mary!”

Most of us in business build our entire decision-making process around assumptions. In this simple math example, we assume that Mary will stop reading. But why do we assume that? If Mary reads 10 books a month and John reads five, he will never catch up to Mary. That will only change if John starts reading 15 books (assuming Mary remains on 10 books a month).

This same anomaly happens in business. Many business leaders are looking for that “magic” product or service or process re-engineering that will enable them to “catch-up” with the industry leaders. Many boards fire CEOs hoping that the right person will conjure up enough tricks to enable them to catch-up with the industry champions. But they forget an important element – they assume that the companies in pole position will do nothing. And usually, these assumptions will cause us to make bad decisions.

Likewise, if we are at the top, we make assumptions that the industry will always be the same and assume the competing factors will remain the same. But these very assumptions dethroned airlines when Southwest Airlines and later AirAsia changed the key competing factors or when Google and later Facebook changed the Internet with extremely different competing factors.

Question everything

Another reason why we make bad decisions is that we trust the “experts.” Again, we assume the expert knows it all. Even doctors get it wrong amazingly often. A study in the United States and Canada estimated that 50,000 people die annually in hospitals due to misdiagnosis. For some reason, we all hate to challenge experts. But according to researchers at Emory University, this is normal.

In an amazing experiment conducted where an MRI scanner was used to gauge brain activity of participants while they made decisions with an expert and without an expert present, the independent decision-making parts of many subjects’ brains pretty much switched off when an expert was present.

“Results showed that brain regions consistent with decision-making were active in participants when making choices on their own; however, there occurred an offloading of the decision-making process in the presence of expert advice,” says Jan B. Engelmann the first author of the study. “This study indicates that the brain relinquishes responsibility when a trusted authority provides expertise,” claims Gregory Berns who led the experiment, adding “the problem with this tendency is that it can work to a person’s detriment if the trusted source turns out to be incompetent or corrupt.”

And in many cases, much to our disadvantage experts can be very wrong. Why do we cede control of decision- making in the presence of “experts?” Many times with experts around, we become lazy to keep asking questions and probing. Asking questions can become a very tiring affair especially for our brain, we so we shut off in the comfortable knowledge that someone else is making the big decision for us.

Decision fatigue

Bad decisions happen more often when we are tired. In a landmark study on judges in 2011 (Danzinger, Levav and Avnaim-Pesso), researchers examined 1,112 judicial rulings over a 10-month period.

Most of us would assume judges would be influenced by the type of crime – murder, rape or theft. What they found was that the judges were affected by the time of their judgment. At the beginning of the day and after lunch break (when the judge was fresh), a judge was likely to give a favourable ruling 65% of the time. However, when the judge was tired from making too many decisions (in the late morning and late afternoon), the probability of a criminal getting a favourable ruling dropped to zero! This trend held true for all cases examined regardless of the crime. Decision fatigue is a huge monster derailing us all the time (not just judges).

So, if you have a big decision to make, take some time to de-stress, unwind and be fresh. Finally, another area I suffer personally from is optimism.

Optimism bias = Bad decisions

I am a naturally optimistic person. According to neuroscientist Tali Sharon, I am extremely susceptible to making bad decisions. Optimism apparently harms good decision-making. In fact, she estimates that 80% of people are like me – we are more optimistic than realistic. On average, we expect things to turn out better than they end up being.

According to her study, people hugely underestimate their chances of being robbed, losing their job or being diagnosed with cancer. We even overestimate our likely life- span (sometimes by 20 years or more). In Engelmann’s experiments, volunteers were given information about the probability of them dying of a disease that was better than they hoped or expected.

Immediately, they adjusted their bias up closer to the new risk percentages presented. But if the information given was worse than they imagined, they tended to ignore this new information. She termed this “optimism bias”.

This “optimism bias” could explain why many of us make bad decisions. We under-estimate budgets and end up going over-budget. Smokers will ignore making a good decision for their health regardless of how overwhelming the evidence. They would simply quote a story of a friend who smoked 10 packs of cigarettes a day and lived till 100. Somehow we are immune to issues.

This positive bias can lead to calamitous blunders – make us less likely to get health check-ups, save for retirement, or do any form of contingency planning. We are also prone to making shoddy investments and impetuous bad decisions for our business. All of us show bias when it comes to what information we take in. We typically focus on anything that agrees with the outcome we want.

So, the next time you are about to make a big decision, check if optimism bias has got the better of you. Better still, check in with a friend or colleague. As 80% of us are caught in this “optimism bias” trap when making decisions, the ideal way to overcome it is to discuss your decision with someone else. I make it a point whenever there is a big decision to make, to talk it over with a few people. If almost all of them feel strongly that I am overly optimistic, I relook at my assumptions and thinking. Sometimes, I change my decisions but even if I do go ahead, I usually change my plans or strategy.

Final thoughts

So, what does this all mean? I’ve showcased four villains of decision-making – bad assumptions, lack of questioning (especially experts), decision fatigue and optimism bias. There are possibly other factors but I think that if we can focus on enabling these areas of our lives to be optimally leveraged, we may just see the quality of our decisions soar to the skies.

One of the best advice I received regarding decision-making was to plan for minor decisions as much as possible. Making decisions drain us, so the best way not to exhaust yourself is to plan ahead and decide quickly on “daily” decisions. Decisions such as what to wear to work, where to eat breakfast and other “daily” decisions should not consume and exhaust you. Better still, outsource some decisions. I try to let all trivial matters be decided by others. This enables me to focus on the key decisions that will add value to my business and will keep me fresh when I need to make them.

Decision-making is leadership. Management guru Peter Drucker once said that “whenever you see a successful business, someone once made a courageous decision.” All great endeavors began once as a wise decision. Are you making great decisions? If not, start making them. Your legacy will hugely depend on your decisions.