RATIONAL DECISION MAKING

“Choices are the hinges of destiny”

– Edwin Markham, 19th Century American Poet


We are human. All of us are a mixture of emotions and rationality. From the time we were born to now, our brains, thought patterns, personality, and intuition have been developing from alchemy of our DNA, experiences, education, and life lessons. And, as much as we think we are objective rational thinkers and decision makers, often we are looking through biased eyes, either fueled by our emotions, or driven by our misguided framing of a situation, and most of the time we don’t even know it.

 

What is Rational Decision Making?


Rational decision making harnesses rationality and logic to make decisions, leaving emotions and biases behind to ensure objective decisions. There are 5 core best practices to rational decision making.

1. Explicit, not implicit decisions

The first rule about decisions is to know when you are making a decision. Too often, in meetings and conversations, where people are making crucial decisions during the general discourse of conversation, I have to interrupt and ask the simple questions, “Ok, so are you saying that is a decision this team is making?”

A critical skill is building a mental pause button when there is a discussion around a big decision. You need to pull the potential decisions out from the hot burning coals of the conversational fire. For, in every big decision are typically major implications to the allocation of precious resources, time, and focus of an organization.

2. More than 1 good option

The quality of a strategy is a function of the quality of strategic options. Satisficing is the term for simply deciding on an option that meets a minimum threshold, instead of expending the effort to find more optimal options. While satisficing works in some situations, like choosing what you’re going to have for lunch, or buying staples, when it comes to important decisions tied to allocating resources satisficing is a chronic disease of underperforming organizations. The bigger the decision the more important it is to spend the time and mental energy to expand the option set to include multiple good options.

3. Objective criteria

Decision making is defined as “the thought process of selecting a logical choice from the available options.” (businessdictionary.com). The thought process is what differentiates good decisions from bad decisions. And, the decision-making thought process should be based on utilizing appropriate objective criteria to evaluate a set of options. The objective criteria can change from decision to decision, but always has the general angle of value or benefit versus cost.

Asking basic questions will give you a good understanding of the costs and benefits, such as:

• What are the implications of this decision?
• What resources will this necessitate?
• Is this more important than our current priorities?
• What are the benefits of doing this versus…?

In this section, we’ll go into more depth into useful strategic tools such as cost-benefit analysis, and decision and prioritization matrices to help with objective criteria.

4. Limited biases

While the decision making thought process should be based on objective criteria, it should also be absent of emotional, cognitive and selection biases, which are inclinations or distorted ways of thinking that can create misinterpretation of situations and lead to poor decisions. Biases need to be consciously avoided when it comes to strategic decision-making. To avoid them you need to understand the important ones.

Emotional & cognitive biases occur when people think and frame situations and decisions in a non-objective or distorted way. Some of the most important cognitive biases include:

• Overconfidence is at the top of the list of biases that often destroy organizations.

• Egocentric bias is when people overvalue their impact on the results of a situation and distort situations for their benefit.

• Confirmation bias occurs when people favor data and information that supports their beliefs.

• “I am the customer bias” happens when people personalize themselves as the organization’s core customer, and interpret data, or make decisions based on them being the core customer.

• Framing bias is when people miss-frame a situation or decision, not taking into account important information or dimensions.

• Causation vs. correlation bias happens when people interpret the correlation of events as being the cause of the event, “It was sunny today, and traffic was heavy. It must mean more people were driving to go enjoy the sun outside.”

• Binary bias occurs when people think black or white or attribute a situation to one or a few variables, “The problem with this company is our marketing is bad.”

• Anchoring bias often happens in negotiations when one party suggests an unreasonable price or term to anchor the counterparty. A typical response to anchoring is to split the difference.

Selection biases is when you analyze a dataset that isn’t representative of the entire dataset. Some of the most important selection biases include:

• Sampling bias is when the sample of people in a survey isn’t representative of your customer.

• Time bias is looking at short or selective time periods can be misleading.

• Seasonality bias is not taking into seasonality when examining historical trends.

Eliminating biases is difficult, but important to tackle. The key is awareness of biases, and asking the right questions when interpreting a situation and in making decisions is the best tool for identifying and avoiding biases. The types of questions to ask include:

• “Are we looking at this situation objectively?”
• “How would our customers think about this?
• “Is this the best path for the organization?”
• “What other facts do we need to make the best decision?”
• “What if we took ourselves out of this decision?”
• “Did A really cause B, or are there other factors we haven’t thought about?”
• “What time frame does this analysis cover?”

5. Timely & decisive

One of the worst situations is when decision-making drags on, or people constantly revisit decisions. Decisions commit resources to follow a path of action, and if decision-making drags on, often those resources are unsure of what to do, creating idleness and inefficiency. Or, if decisions are constantly revisited and reexamined, the resources following a path of action may question their investment and potentially become demoralized. While it is important to assess big decisions thoroughly, and sometimes question them, more often than not, it is better to be timely and decisive in decision making to optimize the utilization of resources.

 

DOWNLOAD THE DECISION MAKING POWERPOINT WORKSHEET


To get you going on improving your decision making, download the free and editable Decision Making PowerPoint Worksheet.

 

 

Exercise

Prepare for your next big meeting by writing down the important decisions that need to be made during the meeting on the rational decision making exercise. Then describe the top potential options for the decision. Write down the objective criteria that should be used to make the decision. Think through and document the potential biases and the timing of the decision.

NEXT SECTION: OPPORTUNITY COST