How to make decisions
Chapter 3 - Experiential Growth Method®
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Welcome to thinking about decision making page
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Warren Buffettː
- "When my company is considering a takeover bid, we often hire an investment banking firm to advise on the acquisition. But this raises a conflict of interest: the bankers strongly incentivise the board to do the deal. There appears to be only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through."
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Core ideas
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Humans as interactionalists
Why has evolution endowed us with a faulty tool, the ability to reason meant to be humanity’s supreme attribute, the characteristic that most sets us apart from other animals? Science has offered an intriguing answer to this question. If our reasoning capacity is insufficient to help us figure out the truth, that’s because truth-seeking isn’t its core function. Instead, human reason evolved because it allows us to argue more effectively. Our human ancestors managed to dominate almost any environment they set foot in, mainly because they were so good at banding together to meet their needs. Given the importance of cooperation to our survival, we’ve evolved a finely tuned set of abilities for dealing with each other. We are ‘interactionists’, as opposed to ‘intellectualists’. For intellectualists, our reasoning capacity is to enable individuals to gain knowledge of the world. In the interactionist view, by contrast, reason didn’t evolve to help individuals reach truths but to facilitate group communication and cooperation. Reasoning makes us smarter only when we practise it with other people in arguments.
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Human knowledge
While humans have accumulated a vast store of collective knowledge, each of us alone knows surprisingly little and often less than we imagine (for instance, we tend to overestimate our understanding of even mundane items, such as cars or bicycles). Yet each of us is plugged into a vast intelligence network, including the near and far cultures. The more open and fluid your intellectual network, the wiser you can be. Moreover, open disagreement is one of the main ways we have of raiding other people's expertise while donating our own to the shared pool.
Looked at through this interactionist lens, confirmation bias is a feature, not a bug of human cognition. It maximises each individual's contribution to a group by motivating them to generate new information and arguments. Think about what it's like when someone contradicts you. You feel motivated to think of all the reasons you're right, and the other person is wrong, especially if it's an issue you care about. You might do so for selfish or emotional reasons – to justify yourself or prove your smartness. Even so, you're helping the group generate a diversity of viewpoints and then select the strongest arguments.
When you bring your opinions to the table, and I bring mine, and we both feel compelled to make the best case we can, the answers that emerge will be stronger for having been forged in the crucible of our disagreement.
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The possibility of being wrong
Humans have an instinctive aversion to the possibility of being wrong. Armed with a hypothesis, we bend reality around it, clinging to our opinions even in the face of evidence to the contrary. If I believe the world is going to hell in a handcart, I’ll only notice bad news and screen out the good. Intelligence is no protection from confirmation bias, nor is knowledge. Clever and knowledgeable individuals are more prone to it since they’re better at finding reasons to support what they already believe and more confident in their mistaken views.
Thanks to the popularisation of research into the flaws of human cognition, we have also become increasingly aware of how difficult it is to argue without “biases,” such as the tendency to take a side and stick to it rather than weighing the evidence for different positions with an open mind. It can be tempting to avoid open debate altogether, but this only turns our differences into gloomy resentments while robbing us of a powerful tool for inquiry. An alternative is to propose that debates should be scrupulously polite, emotionally detached, and impeccably rational when they occur.
We are strongly inclined to search for evidence that confirms our beliefs rather than to look for ways to disprove them. This flaw has since gained a catchy name - confirmation bias - and become one of the most well-evidenced findings in psychology.
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Argument
It’s pointless having a group of smart people around a table if all they do is nod along with each other. Even if it is wrong, pursuing a firmly held belief can still be productive at the group level. It is an elegant paradox: for a group to arrive at rational conclusions, at least some of its members must engage in a little irrational reasoning. When everyone feels compelled to generate and undermine competing arguments, the weakest arguments are rejected while the strongest ones survive, supported by more evidence and better reasons. The result is a more profound and more rigorous process of reasoning than any one person could have performed alone. Emotion does not impede this process; it electrifies it.
- The first condition, of course, is to disagree openly. The group members must bring their own opinions and insights to the table rather than just adopting those they like the most or nodding along with the dominant voices in the room—the more diverse the pool of reasons and information, the greater the chance of compelling arguments emerging.
- A second condition is that the debate should be allowed to become passionate without becoming a shouting match. Good listening can be a function of close and respectful personal relationships.
- Third, the members of the group must share a common goal. If each member is only defending their position or trying to get one up on everyone else, weaker arguments won’t get eliminated, and the group won’t progress. We should bring our whole, passionate, biased selves to the table, remembering that our ultimate responsibility is to the group. In the end, what matters is not that I am right but that we are.
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On the workfloor
Who makes strategic decisions?
In large organisations, as well as in small ones, hierarchy is the norm. The boss makes the calls. Human beings are social animals and are quick to create a pecking order in the absence of clear signals. Hierarchy is the norm. We can buy and sell social capital, and we can politic and manoeuvre, but at the end of the day, the hierarchy wins out.
It’s the job of the board to allocate resources (time, people, and money) to projects. So, they are the ones making strategic decisions. The board is often composed of seasoned executives with 20 years of experience who are well-versed in making critical business decisions. But experience can be a handicap when it comes to disruptive or even adjacent innovation.
The dangers of experience
Experience may say, “We tried this before!” Or “The customers will never go for that.” But those are the voices of the market 20 years ago, not today. Markets are changing rapidly. In the B2B world, open-source technology is rendering existing players obsolete, and AI algorithms are automating tasks that once required the expertise of highly educated university graduates. We may think that a B2C model would be a better approach than a B2B model, but we may also feel that the price is too low, and we may believe blue would be a better colour for a logo, but those are all opinions. They are not facts.
We are allowed to have opinions and can contribute them, but we should be suspicious of them. Experience tells us what has happened but not what will happen in a chaotic environment. Therefore, we must rely on evidence and make data-based decisions.
Keep strategic decisions close to the information
Most of the time, the person who truly has the most information is often located near the bottom of the hierarchy and close to the actual customers. The best decisions are made at the bottom and supported by the top. This is not bottoms-up decision-making by consensus. It’s not making a decision that makes everyone happy (or everyone equally unhappy). This is not a change in the hierarchy. People at the top will still be at the top and need to bring their strategic perspective to the table. These are data-driven decisions made by individuals with the most comprehensive information. That often means the person on the bottom makes the decision, and the top supports them by getting the rest of the organisation aligned.
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