The past decade has seen a wealth of research on decision making, yet business executives seem impervious to its lessons. The problem is not that they lack the desire to make better decisions. It’s that the bulk of the research does not apply to the kind of decision that’s most challenging for them.
Decisions vary along two dimensions. The first considers whether the decision maker can influence the terms and the outcome. The second addresses whether the aim is to do well or to do better than others. Before making any decision, the most important thing is to understand what kind it is.
Decision research has produced good advice for routine choices and judgments, such as personal investment decisions, where people are choosing among the products before them, have no ability to change them, and are not competing with anyone. For these decisions, research has shown, it’s important to avoid common biases.
But strategic decisions, such as entering a new market or acquiring another company, are completely different. Executives can actively influence outcomes. Furthermore, success means doing better than rivals. For these decisions, executives need more than an ability to avoid common biases. They require a talent for clear-eyed analysis and the ability to take bold action.
Decisions vary along two dimensions: control and performance. The first considers how much we can influence the terms of the decision and the outcome. Are we choosing among options presented to us, or can we shape those options? Are we making a onetime judgment, unable to change what happens after the fact, or do we have some control over how things play out once we’ve made the decision? The second dimension addresses the way we measure success. Is our aim to do well, no matter what anyone else does, or do we need to do better than others? That is, is performance absolute or relative?
There are other ways to think about decisions, of course. Some are made by people acting as individuals and others by people acting as leaders of organizations; some are one-offs while others are part of a sequence, with the results of one letting us improve the next. But as a basic way to understand how decisions differ, control and performance are the two dimensions that matter most. Combining them creates four fields of decisions.
Four Types of Decisions
1: Making routine choices and judgments.
When you go shopping in a supermarket or a department store, you typically pick from the products before you. Those items, perhaps a jug of milk or a jar of jam, are what they are. You have no ability to improve them. Control is low. Moreover, you make the choice that suits you best—it doesn’t matter what anyone else is buying. Performance is absolute. The same goes for most personal investment decisions. You may be able to decide which company’s shares to buy, but you can’t improve their performance after you buy them. You want high returns but aren’t trying to do better than others. The goal is to do well, not to finish first in a competition.
2: Influencing outcomes.
Many decisions involve more than selecting among options we cannot improve or making judgments about things we cannot influence. In so much of life, we use our energy and talents to make things happen. Imagine that the task at hand is to determine how long we will need to complete a project. That’s a judgment we can control; indeed, it’s up to us to get the project done. Here, positive thinking matters. By believing we can do well, perhaps even holding a level of confidence that is by some definitions a bit excessive, we can often improve performance. Optimism isn’t useful in picking stocks whose performance we cannot change, but in the second field, where we have the ability to influence outcomes, it can be very important.
3: Placing competitive bets.
The third field introduces a competitive dimension. Success is no longer a matter of absolute performance but depends on how well you do relative to others. The best decisions must anticipate the moves of rivals. That’s the essence of strategic thinking, which Princeton professor Avinash Dixit and Yale professor Barry Nalebuff define as “the art of outdoing an adversary, knowing that the adversary is trying to do the same to you.” Investments in stocks are typically first-field decisions, but if you’re taking part in a contest where the investor with the highest return takes the prize, you’re in the third field. Now you need to make decisions with an eye to what your rivals will do, anticipating their likely moves so that you can have the best chance of winning.
In the third field, guidance comes from the branch of economics that studies competitive dynamics: game theory. Well-known illustrations of game theory include the prisoner’s dilemma and the game rock-paper-scissors, in which the winner is determined by the interaction of all players’ decisions. Game theory can illuminate areas from price competition to geopolitics, yet it has an important limitation: Players cannot alter the terms of the game. The possible moves are specified, and gains and costs cannot be changed. That’s a helpful simplification for purposes of modeling, but it reduces the value for managers. Management, after all, is precisely about influencing outcomes over time. That’s why Herbert Simon, in his 1978 Nobel Prize address, commented that for all its sophistication, game theory does not provide “satisfactory descriptions of actual human behavior.” An essential aspect of so many crucial decisions is absent.
Decisions in the Fourth Field
The crux of our discussion comes into focus when we consider the fourth field. For these decisions, we can actively influence outcomes, and success means doing better than rivals. Here we find the essence of strategic management.
When positive thinking can influence outcomes, only those who go beyond what seems reasonable will succeed.
The fourth field includes some of the most consequential decisions of all, but because of their complexity they don’t lend themselves to the careful controls of laboratory experiments, so we know less about how best to make them. What sort of mind-set do they require? When we can influence outcomes, it is useful to summon high levels of self-belief. And when we need to outperform rivals, such elevated levels are not just useful but indeed essential. Only those who are able to muster a degree of commitment and determination that is by some definitions excessive will be in a position to win. That’s not to say that wildly optimistic thinking will predictably lead to success. It won’t. But in tough competitive situations where positive thinking can influence outcomes, only those who are willing to go beyond what seems reasonable will succeed.
First-Field Research, Fourth-Field Decisions
In many of the most consequential decisions executives face—whether to acquire a company, say, or launch a new product—they can influence the outcomes, and their choices are successful only if they’re better than the competition’s.
These decisions fall into the fourth field of a matrix that categorizes decisions along two dimensions: our control over the outcome and whether the outcome depends on other people’s decisions. We would benefit greatly from improving how we make these fourth-field decisions. Yet most recent research has examined judgment and choice in first-field decisions, which offer no control over outcomes and can be successful regardless of what anyone else does.
This focus stems in part from the power of carefully controlled experiments, which are an ideal way to isolate the cognitive mechanisms of human thought. By asking subjects to make choices among clearly stated options or to make judgments about things they cannot influence, we derive responses that can be neatly compared, free of extraneous factors. Decision research has made profound contributions because of the rigor of its experimental methods.
The unintentional effect, however, is that less research has focused on the second and third fields, and much less on the fourth field, where the ability to influence outcomes makes the comparison of responses across people problematic, and where the need to outperform rivals adds further complexity. Thus the paradox: Fourth-field decisions, which in real life include many of the most important, have received the least attention.
After the decision: Seek commitment, not unanimous agreement
In his April 2017 letter to Amazon shareholders, CEO Jeff Bezos introduced the concept of “disagree and commit” with respect to decision making. It’s good advice that often goes overlooked. Too frequently, executives charged with making decisions at the three levels discussed earlier leave the meeting assuming that once there’s been a show of hands—or nods of agreement—the job is done. Far from it.
Indeed, any agreement voiced in the absence of a strong sense of collective responsibility can prove ephemeral. This was true at a US-based global financial-services company, where a business-unit leader initially agreed during a committee meeting not to change the fee structure for a key product but later reversed course. The temptation was too great: the fee changes helped the leader’s own business unit—albeit ultimately at the expense of other units whose revenues were cannibalized.
One of the most important characteristics of a good decision is that it’s made in such a way that it will be fully and effectively implemented. That requires commitment, something that is not always straightforward in companies where consensus is a strong part of the culture (and key players acquiesce reluctantly) or after big-bet situations where the vigorous debate we recommended earlier has taken place. At a mining company, real commitment proved difficult because the culture valued “firefighting” behavior. In staff meetings, company executives would quickly agree to take on new tasks because it made them look good in front of the CEO, but they weren’t truly committed to following through. It was only when the leadership team changed this dynamic by focusing on follow-up, execution risks, and bandwidth constraints that execution improved.
While it’s important to devote enough resources to help propel follow-through, and it’s also important to assign accountability for getting things done to an individual or at most a small group of individuals, the biggest challenge is to foster an “all-in” culture that encourages everyone to pull together. That often means involving as many people as possible in the outcome—something that, paradoxically, in the end will enable the decision to be implemented more speedily.
Follow the value
There are many keys to better decision making, but in our experience focusing on the three practices discussed here—and on the commitment to implement decisions once taken—can reap early and substantial dividends. This presupposes, of course, that the decisions leaders make at all levels of the organization reflect the company’s strategy and its value-creation agenda. That may seem obvious, but it bears repeating because all too often it simply doesn’t happen.
Take the manufacturing company whose operations managers, faced with calls from the sales team to raise production in response to anticipated customer demand, had to consider whether they should spend unbudgeted money on overtime and hiring extra staff. With their bonuses linked exclusively to cost targets, they faced a dilemma. If they took the decision to increase costs and new orders failed to materialize, their remuneration would suffer; if the sales team managed to win new business, the sales representatives would get the kudos, but the operations team would receive no additional credit and no additional reward. Not surprisingly, the operations managers, in their weekly planning meeting, opted not to take the risk, rejected a proposal to set up a new production line, and thereby hindered (albeit inadvertently) the group’s higher growth ambitions.
This poor-quality—and in our view avoidable—outcome was the direct result of siloed thinking and a set of narrow incentives in conflict with the group’s broader strategy and value-creation agenda. The underlying management challenge is part of a dynamic we see repeated again and again: when senior executives fail to explore—and then explain—the context and underlying strategic intentions associated with various targets and directives they set, they make unintended consequences inevitable. Worse, the lack of clarity makes it very difficult for colleagues further down in the organization to use their judgment to see past the silos and remedy the situation
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