Decision making
Gen Z is characterized by their digital fluency, their desire for personalized and convenient services, and importantly, for their environmental consciousness.
Drucker wrote that whatever managers do, they do it through making decisions. The performance of executives is to a large extent the result of the quality of their decisions.
We make most decisions in dynamic situations, and they are dynamic in two ways. First, externally, meaning that often, when we need to make decisions, we’re missing relevant information. Second, internally, our objectives, preferences, and inclinations are not stable, they evolve and depend on the context.
Our brain has the tendency to present decisions in complex situations as a challenge of choosing either stability (exploit) or change (explore).
The Decision Navigator model is a slow approach to decision-making. It cultivates an experimentation-based, learning-oriented, and adaptive approach to decision-making that matches the complex, environment in which we operate.
Decisions are path dependent; all decisions we make are connected, each step leading to another step. Also we do not travel alone.
Understanding Decisions under Uncertainty
Making Great Predictions
It is note enough to possess a good mind; the most important thing is to apply it correctly, according to Rene Descartes.
Decisions can be categorized into one of three types:
- Decisions under certainty. You know all the possible options and the consequences of each option. The outcomes of each option are certain.
- Decisions under risk. You know all the possible options and their outcomes. The outcomes are only probable, but you know the probability. Leonard Savage, the founder of probabilistic or Bayesian decision theory is talking about ‘small worlds’ that are situations in which Bayesian theory – in essence probabilistic thinking – provides the best answer.
- Decisions under uncertainty. All possible options, outcomes and probabilities are unknown. Classical approaches of decision theory aren’t sufficient to make decisions in such situations. When making decisions under uncertainty, we make predictions about the future. We apply heuristics or general rules, to make decisions.
The capacity of our ancestors to anticipate and prepare for potential future events provided a substantial survival advantage.
Brier scores measure the accuracy of the forecasters predictions. They range between 0 and 1. 0 means that it is always correct, 1 that it is never correct. An average individual would typically get a score, a prediction accuracy, of 0,2 to 0,25. The analysis suggest that attending a tutorial in probabilistic thinking reduces the Brier score from 0,21, to 0,19. It improves individual forecaster’s prediction by 10 %. The teams’ prediction accuracy increases by another 26 %, or 33% compared to untrained individuals. Team of superforcasters have even lower Brier score. 0,08, that is very close to perfect predictions.
Factors that drive forecast accuracy according to studies by Barbara Meller and her colleagues:
- Traits – characteristics that individuals are born with.
- Situational factors – like being placed in a group to debate forecasts.
- Behavioral patterns.
With traits the variable that most predicted forecast accuracy was intelligence. We have two types of intelligence, fluid and crystalized. An important trait is also to have a scientific worldview and not deterministic one.
In situational factors the most important driver of prediction accuracy was working in teams.
In behavioral patterns that included abilities and thinking styles the single most important driver of prediction in accuracy was the frequency of updating forecasts.
There are several strategies that can help you increase your ability to make more accurate predictions:
- Build great teams.
- Surround yourself with smart people.
- Take care of yourself.
- Possibly, adopt a growth mindset.
Intelligence is not strongly correlated with leadership effectiveness. Above-average intelligence might be a blessing for predictions but a curse for decision-making.
Making People Decisions
Sometimes people have a will issue and not a skill issue.
Sometimes you want to signal to the organization that you don’t accept people who are not willing to collaborate for the good of the company.
Developing Options to Approximate the Right Decision
Under uncertainty, we often must choose between continuing to do what we are doing or changing the approach. We must choose between a known alternative with a known reward and an unknown one with an unknown but potentially higher reward.
We call choosing the know alternative exploit, while choosing the unknown alternative is called explore. Exploitation is the optimization of performance.
While a dilemma looks like a choice between two options, it isn’t. Our brain has the tendency to simplify a complex situation into two categories.
Safe vs. dangerous and friend vs. foe categories offered a survival advantage.
The only factor that limits the number of possible options is your imagination. It isn’t about either-or, but more about and, and.
Gittins and Jones developed an approach for finding optimal answers to an uncertain decision. The Gittins index assumes that you’re making choices from a finite number of options for which the rewards are delivered with unknown but fixed probabilities.
Hebert Simon explained nicely that we don’t now always have all the information we need. Against this background we tend to look for satisfying solutions rather than optimum ones. We are satisficers.
While we cannot calculate the optimal exploit-explore balance exactly, we may be able to approximate a good-enough or satisfactory exploitation-exploration balance. Our brain seems to consider seven decision rules of thumb – author calls them heuristics.
- The first factor is the ambitiousness of your goal. To increase the level of goal achievement you can: visualize your goals, make your goals important to you, write them down.
- The second factor is opportunities. The inclination to explore increases when information about new opportunities become available.
- The third factor is time.
- The fourth factor is social context.
- The fifth factor is your personality and values. Your inclination to take risks matters. The inclination to think, especially about the future, and learning-orientation may also matter.
- The six one is your skills.
- And finally, the last and the seventh one is your mood or cognitive state.
The approach of simultaneously exploiting and exploring is called ambidexterity. It comes from Latin. In Latin, dexter means right or related to the right side. In the seventeenth century, the English author Sir Thomas Browne combined the term dexter with ambi, which in Latin means both.
Organizations seem to use the same seven heuristics, but in a slightly adjusted form:
- The more ambitious the objectives, the more explorative the chosen option or strategy.
- The more opportunities, the more explorative the chosen option or strategy.
- The more time and resources available, the more explorative the chosen option or strategy.
- Competitive actions can influence the exploit-explore balance in different ways.
- A chosen option or strategy is likely to be consistent with organization’s culture and values.
- A chosen option or strategy is likely to be consistent with organization’s capabilities.
- A chosen option or strategy is likely to reflect the general mood in a work organization.
Making Decisions under Uncertainty
Making Strategic Decisions
Create options.
Identifying Assumptions and Testing them
How can all your top team members look at the same information and interpret it so differently?
Our background, our history, our past experiences shape how we experience reality.
Many cognitive biases are largely based on experience that have created unconscious associations as cause-and-effect relationships.
Our brains are the most developed of all vertebrates. The inner part is toward the back and the bottom of the brain. The brainstem processes sensory functions, such as vision, hearing, smell, and balance. If we move forward and upward we arrive at the thalamus and the hypothalamus. The thalamus is lie a relay station, the hypothalamus is responsible for homeostasis. When we move toward the front and upward the first area that we encounter is the limbic system, which includes the amygdala and the hippocampus. Hippocampus is important for storing information and facts and forming long-term memories. Finally there is cerebral cortex, with two parts that are called hemispheres.
The mammalian brain encompasses the limbic system and striatum, the neocortex is more active when we explore.
Newer research suggests that cognitive fatigue results from an accumulation of glutamate in the neocortex. Glutamate is an excitatory neurotransmitter that plays a role in learning and memory-formation.
Habits, skills, or competencies are all forms of exploitation routines. They can be carried out without much cognitive effort. Today’s exploitation strategies are yesterday’s exploration strategies.
While allowing for efficient and fast decision-making in familiar situations, cognitive biases can lead to distortions (the glasses) and poor decisions in novel, unfamiliar situations.
A stepwise approach to overcome your brain’s tendency to use experience-based biases:
- Step 1 is to start from the problem and to identify the exploit-explore dilemma.
- Step 2 is to widen the option space on the exploit-explore continuum. Thinking in options counterbalance the brain tendency to exploit, that is, to build on experience and to use biases. Teams are particularly effective in widening the option space.
- Step 3 is to identify unconscious assumptions for each of the options along the seven exploit-explore heuristics. Why do you believe that that options will work? What do you assume are the objectives? What do you assume are the opportunities? What is your hypothesis, how much time do we have? What’s your hypothesis on what competitors will do? Why do you assume that the option fits us in terms of culture, competencies, and cognitive states? No matter which assumptions drive your options; it is important to write them down. It helps to de-personalize them.
- Step 4 is to test assumptions. Validate the assumptions with facts.
Making Decisions About Company Growth
Find a champion for every options and listen to their argumentation.
Developing Better Options
The process of identifying and testing assumptions de-personifies the discussion of options and makes teams work together effectively.
You kind of change a boundary conditions if you develop an option that was not there. When none of the available options is satisfactory, you should try to create new ones.
Six steps of decision-making model for dynamic and uncertain situations. The Decision Navigator:
- Step 1: Dilemma. Identify the exploit-explore dilemma.
- Step 2: Options. Widen the option space along the exploit-explore continuum.
- Step 3: Conditions. Identify assumptions for each of the options along the seven exploit-explore heuristics, asking yourself, what assumptions need to hold for this option to be valid. Seven heuristics are ambition, opportunities, time, social context, personality and values, skills, cognitive states.
- Step 4: Test. Test the relevant assumptions.
- Step 5: Optimization. Change boundary conditions to expand the option space.
- Step 6: Resolution. Decide.
You can solve a problem bottom-up. This is called inductive problem solving. You start from a fact or observations, you see a pattern, and you develop a theory, a solution. It is easy and fast. The caveat is that it tends to lead to biased solutions.
Deductive problem solving is top-down. You develop a theory, a solution, that you believe will solve a problem. It is based on hypotheses, which you then test and validate to come up with a valid, fact based, and unbiased conclusion. In science, deductive thinking is used for confirmatory studies. The drawbacks are that it seldom leads to new insights, and that it takes time.
By first developing different options, the decision-making model is using inductive thinking.
Intuition can be defined as “affectively charged judgments that arise through rapid, nonconscious, and holistic associations”. Intuition is efficient. When decisions really matter, intuition should be augmented with a deliberate, deductive approach of testing assumptions.
Using the proposed decision-making model effectively requires having a scientific mindset. Adam Grant coined the term “Confident Humility”. A mindset of feeling confident about yourself, about your abilities, but not your tools, your theories, or your beliefs. It describes a mindset in which you doubt your own knowledge and theories, your stay curious, and you enjoy discovering something new. Confident humility may protect you from the Dunning-Kruger effect.
Managing the Tensions Created by Decision under Uncertainty
Implementing Decisions
Deciding is easy, getting everybody on board to follow the decision and implementing it, is another game.
Managing Change
Tensions are the product of running two very different businesses simultaneously in an organization.
The strategic intent of exploitation-oriented activities and businesses is mostly cost- and profit-oriented; critical tasks include operational efficiency and continuous innovation; the competences are also rather operational; the organizational structure is formal; margins and productivity are core KPIs; the culture is oriented toward customers efficiency, and quality; the organization is risk averse; and the leadership style is top-down.
In exploration-oriented activities and business, the strategic intent turns toward innovation and growth; critical tasks include exercising adaptability, creating new products, and practicing breakthrough innovation; the competencies are rather entrepreneurial; the organization structure is loose; the culture fosters willingness to take risks; the organization prizes flexibility, speed, and the curiosity to experiment; and the leadership style tends to be visionary.
Ambidextrous organizations both exploit and explore. They pursue three approaches to managing tensions: keeping exploitation and exploration activities separate, concentrating tensions into high-performing top teams and changing how people behave in firms.
Structural separation is typically the most straightforward approach. It works only if there is a low level of integration between exploitation and exploration activities.
Contextual and temporal ambidexterity require better, more skilled leadership.
Diversity is a matter of mindset. The benefits of diversity are only captured when team members value diverse perspectives and opinions.
Many of the routines in an organization – how people behave and interact, how they work, how they make decisions – are exploitation strategies, that is habits, skills, or simply “the way we do things around here”.
Managers sometimes underestimate the anxiety and fear employees can experience when they face a negative change in their working context.
Applying the seven factors for optimizing individuals’ exploit-explore balance suggests that employees can change under the following conditions:
- Objectives – they have ambitious goals they can’t reach by exploitation only.
- Opportunities – they see the opportunities and benefits that changing behavior might create or incentives it might earn.
- Time and resources – they have time and other resources to experiment with new behaviors.
- Others’ action – their social context supports flexibility when they see other people change their behavior.
- Values and culture – the changes they are required to make align with their values, the corporate culture, and their own personal standards.
- Capabilities – they are able to make these changes.
- State of mind – they feel safe and rested.
Financial incentives are effective when employees believe that there is a causal link between their individual actions and the outcome that the company is intending. Also, they are effective when that outcome can be easily measured.
Most of people’s thinking, experience, and knowledge is organized as stories.
Three approaches to managing tensions: separation, high-performing top teams and fostering behavioral change. They are based on factors like: level of integration needed, time availability and leading self, others and organization.
Becoming Super Deciders
Making Work-Life Balance Decisions
How to balance work and life is sometimes the key decision.
Becoming Better at Making Decisions
“Everyone thinks of changing the world, but no one thinks of changing himself.” Lev Tolstoj[1]
Several factors may negatively affect cognitive performance:
- Sleep deprivation.
- Poor physical condition.
- An unbalanced diet.
- Persistent high cognitive load and limited time for reflections.
- Lack of purpose and connection with others.
You can regulate cognitive states relatively quickly.
Three cognitive skills seem to be particularly relevant to decision making: attention control, cognitive flexibility, and empathy.
Attention control includes the ability to focus and sustain such focus, evaluate and plan potential alternative courses of action, and choose among them. Cognitive flexibility is the ability to change thoughts or action depending on the environment. Empathy refers to an interaction between two people where one experiences and shares the other’s emotional and cognitive states.
Cognitive empathy or Theory of Mind refers to understanding or being able to mentally simulate what another person thinks and feels without experiencing it yourself.
Cognitive-behavioral inclinations – commonly called character, personality, or values – make up the third set of factors that affect the exploration/exploitation balance. Cognitive-behavioral inclinations are hard to change, and yet they also can serve as guidepost and inspiration for decisions under uncertainty.
Neurotransmitters used as neuromodulators include dopamine (the happiness hormone), serotonin (the well-being hormone) and histamine, norepinephrine or noradrenaline (the stress hormone).
Making “Tough” Decisions
How can you reconcile the different and diverging expectations?
Preparing to Be Wrong
Author uses three lenses to unearth and better understand cognitive-behavioral inclinations: personality, values and reactive emotional tendencies.
Temperament influences automatic, unconscious behavioral responses and has four dimensions:
- Novelty Seeking.
- Harm Avoidance.
- Reward Dependence.
- Persistence.
Character’s three dimensions are determined more by environment and social factors than by genes:
- Self Directedness.
- Cooperativeness:
- Self-Transcedence.
Values provide each person with an internal signpost of what is good, desirable, important, and valuable. Values have strong influence on behavioral tendencies.
Emotions are valid across cultures. They are believed to be result of evolution. They serve many purposes. They help us remember, communicate, and connect.
Karen Horney talks about Reactive Emotional Tendencies. They describe habitual behavior in situation of stress and pressure, for instance. Building on Horney’s work, Andreson and Adams identified three main reactive tendencies: controlling, protecting and complying.
When making tough decisions, it is important to know what you stand for.
Conclusions
Epilogue
Leaders get bogged down if they try to meet every demand including those that conflict.
Conclusions
Five implications for individuals:
- Put yourself at the center, to be in the best state to then think and care about others.
- Get to know yourself. Introspection and reflection can help.
- Don’t make important decisions alone.
- Keep a learning mindset and aim for learning new stuff every day.
- Practice using the Decision Navigator.
Five implications for organizations:
- Create engaging and mentally safe work environments.
- Experiment with cognitive skills training.
- Ensure cognitive and behavioral diversity in the senior executive team.
- Use cognitive skills and cognitive-behavioral inclinations as criteria for recruitment and advancement.
- Train executives in using the Decision Navigator and embedded it in the performance management system.
[1] In the book on page 165
