To make a good decision, you need to have a sense of two things: how different choices change the likelihood of different outcomes and how desirable each of those outcomes is. In other words, decision making requires both prediction and judgment.
But how do you get better at either of these? By following the below listed three rules, you can improve your ability to predict the effects of your choices and also assess their desirability.
- Be less certain.
Overconfidence is not a universal phenomenon — it depends on many factors, including culture and personality — but the chances are that you’re more confident about each step of the decision-making process than you ought to be.
So, the first rule of decision making is to just be less certain — about everything. Think choice A will lead to outcome B? It’s probably a bit less likely than you believe! Think outcome B is preferable to outcome C? You’re probably too confident about that as well!
Once you accept that you’re overconfident, you can revisit the logic of your decisions. What else would you think about if you were less sure that A would cause B, or that B is preferable to C? Have you prepared for a dramatically different outcome, than the one you are expecting.
While it’s not possible to always be right, it’s totally possible to be less overconfident.
- Ask “How often does that typically happen?”
Research suggests, the best starting point for predictions — a key input into decision making — is to ask “How often does that typically happen?” If you are considering funding a startup, you might ask: What percentage of startups fail? (Or, what percentage succeed?) If your company is considering an acquisition, it should start by asking how often acquisitions enhance the acquirer’s value or otherwise further its goals.
This rule, known as the base rate, comes up a lot in the research on prediction, but it might be helpful for the judgment side of decision making, too. If you think outcome B is preferable to outcome C, you might ask: How often has that historically been the case? For instance, if you’re thinking about starting a company, and you’re weighing the possibility of spending years on a company that may fail against staying in your current job, you might ask: How often do entrepreneurs who fail end up wishing they’d stayed at their previous job?
The idea with both prediction and judgment is to get away from the “inside view,” where the specifics of the decision can overwhelm your analysis. Instead, you want to take the “outside view,” where you start with similar cases before considering the specifics of your individual case.
- Think probabilistically — and learn some basic probability.
The first two rules can be implemented right away; this one takes a bit of time. But it’s worth it. Research has shown that even relatively basic training in probability makes people better forecasters and helps them avoid certain cognitive biases.
Improving your ability to think probabilistically will help you with the first two rules. You’ll be able to better express your uncertainty and also to numerically think about “How often does this usually happen?” The three rules together are more powerful than any of them alone.
The team at Actuate Business Consulting, a knowledge-based management consulting firm in India, believes, that great decision makers don’t follow these rules only when facing a particularly difficult choice; they return to them all the time. They recognize that even seemingly easy decisions can be hard — and that they probably know less than they think they do. One must practice these rules on regular basis, even for the seemingly easy decisions, in order to master them.