Decision-Making Masterclass: Tools To Help You Make Better Decision (Part 1)
Anyone can learn how to make decisions, but it takes practice to get good at it.
Choosing what to eat for breakfast, picking a career, making an investment, or choosing a partner are all examples of decision-making. Some decisions are small, while others have big rewards. The consequence of a decision will have both short-term and long-term effects, for better or for worse.
Learning to make better decisions can help you grow personally, avoid harm, and achieve success in many areas of life.
In business, decision-making is crucial to start, grow, and survive in a competitive landscape.
Apple, Google, Facebook, and Microsoft are the results of people who chose to start, grow, and expand their empires. On the other hand, Blockbuster, Enron, and Lehman Brothers failed because someone made a bad decision in the past.
Today, we will explore various aspects of decision-making, including decision-making frameworks, cognitive biases, and the impact of emotions, and provide insights on how to improve your decision-making skills and achieve success in many areas of life.
Types of decisions
There are different types of decisions:
Simple. Decisions that don’t require too much mental energy and the outcome may not be supremely rewarding. For example, picking what food to eat for dinner.
Complex. Decisions that require a lot of thinking, learning, debating, and involving many people. These types of decisions are related more to macro levels such as policy and legislation.
Routine. Decisions that involve a sequence of actions that are repetitive. These require some energy in the beginning but don’t require as much later on as it sets up a sequence of actions to follow. These types of decisions are similar to morning habits, workout routines, and study sessions.
Strategic. Decisions that involve a sequence of step-by-step actions, from beginning to end, cause and effect. These types of decisions happen at higher corporate levels, where companies gather resources and build a successful campaign for their product. For example, making an iPhone requires a lot of strategic decisions from different groups to build, launch, market, and sell it successfully to customers.
Tactical. Decisions that require a lot of options to accomplish goals in the short-term outcome. These types of decisions happen in sports where coaches and players have to adjust their playing to win over the opponent.
Each person has different decision-making preferences. Some choose to favor simple; some choose to be complex; some choose to be strategic.
Understanding different types of decision-making helps you navigate the complex world with ease. Decision-making types also belong to occupations to help professionals be more productive.
The more you understand your favored decision-making style, the more aware you are of your personality. This can allow you to capitalize on the work you do and also leave opportunities for you to improve other types through learning. When you have more tools in your toolbox, you can adjust to many circumstances that require you to pick the right type of decision.
One thing to remember: don’t use strategic decision-making to pick your breakfast.
When you’re in doubt, keep it simple.
Cognitive biases
Cognitive biases are quick tendencies people rely on when making decisions. These tendencies enrich confidence to help people make favored choices.
Unfortunately, people often rely on information they have a bias toward rather than using proper data. Making decisions based on biases can often result in mistakes or problems down the road.
There are several common biases people hold when making decisions:
Anchoring. This tendency happens when people rely heavily on the first piece of information (the "anchor") when making a decision. People do make judgments based on this initial information, even if it is irrelevant to the decision at hand.
Confirmation bias. This is the tendency to seek out information that confirms one's pre-existing beliefs while ignoring evidence that contradicts them. Confirmation bias can lead to faulty decision-making because it skews our perception of reality.
Overconfidence bias. People usually overestimate their abilities, knowledge, and the accuracy of their predictions. Overconfidence can lead to making decisions without thoroughly evaluating the available information.
Hindsight bias. This occurs when people believe that they can predict an event after successfully predicting the last one. Hindsight bias can lead to overconfidence in one's ability to predict the future without taking a careful look at unforeseen factors.
Sunk cost fallacy. This bias occurs when people keep investing their resources into a losing investment. The commitment they have made makes it hard to get out of it, and they continue to put in more, causing more upsets.
Cognitive biases happen very often and pose a threat to potential harm for bigger decisions. Therefore, understanding cognitive biases can lead to reducing errors in judgment and decision-making.
The role of emotion
Emotions can significantly impact decision-making.
They provide valuable intuition based on culture and upbringing, helping people handle circumstances based on past experiences.
However, emotions can also cause harm in decision-making. People often choose a course of action based on how they feel in the moment and avoid any further logical implications.
This can lead to biases and impulsive behavior.
To make better decisions, it is important to recognize the influence of emotions and take action to manage them. This may involve studying the situation objectively, seeking advice from others, and being aware of potential biases.
The key is to find a balance between emotional awareness and logical reasoning in decision-making to achieve the best results.
Decision-making frameworks
In today’s fast-paced, changing world, decision-making can be challenging.
Making decisions can be a daunting task, especially when the stakes are high or when available information is incomplete. How does one know when to act quickly or take more time to gather information and weigh options? A decision framework can help one repeat actions while reducing errors in their choices.
Here are some popular frameworks that have been studied and published:
Nudge theory
Nudge theory is a behavioral economics concept that refers to how subtle interventions can influence people’s behavior and decision.
The theory was popularized by Nobel laureate economist Richard Thaler and legal scholar Cass Sunstein. In their book "Nudge: Improving Choices Concerning Health, Wealth, and Happiness", Thaler and Sunstein say that people often make bad choices because of cognitive biases, heuristics, and other problems with the way they make decisions.
By understanding these behavioral tendencies, organizations can create small interventions or "nudges" that help people make better decisions and improve their overall well-being.
Nudges can take various forms, such as:
Defaults: People often choose the default option out of laziness or to avoid making a decision. For example, Automatically enrolling employees in a retirement savings plan with an opt-out option can boost participation rates.
Choice architecture: Arranging or presenting options can impact people's choices. In a cafeteria, offering better food options at eye level can encourage healthier eating.
Framing: How information is presented can influence decisions. Presenting potential outcomes as wins rather than costs can encourage people to get immunized.
Social norms: Sharing information about social norms or others' behavior might encourage agreement. Informing neighbors that most recycling can inspire them to recycle.
Feedback and reminders: Keeping key facts in mind or encouraging commitments might help people make better judgments.
While nudges can encourage behavior change, it is essential to consider the ethical implications of influencing people's choices.
Bayesian Theory
Bayesian theory is a framework that relies on math and data to help individuals make decisions. Thomas Bayes explains how collecting new data can improve the accuracy of predicting the future. As more evidence is collected, the data becomes well-formed and provides better insight for individuals to make decisions.
Bayesian theory differs significantly from Nudge theory in both its focus and application.
Bayesian theory has a focus on statistical inference and probability, helping people update their beliefs and make better decisions based on available data. Nudge theory, in contrast, focuses on understanding human behavior and cognitive bias to design interventions that influence decisions.
Second-order thinking
Second-order thinking is a valuable concept in decision-making.
It requires individuals to think about the future consequence of their choice. Anticipating those possible scenarios can help them avoid negative outcomes.
Secon-order thinking can help individuals capture any missed opportunities.
By paying attention to future outcomes, individuals can choose the option that provides the best return. They can weigh the options between instant and long-term gratification to make the right choice.
Second-order thinking also has its limitations, which can lead to decision paralysis. Focusing too much on future consequences can lead to overthinking, delaying decisive action, and preventing individuals from working toward their goals.
It's essential to balance this approach with decisive action and use other decision-making tools and techniques to develop a well-rounded decision-making process.
Intuition vs. analysis
Intuition refers to the "gut feeling" or an instinctive response to a situation.
This feeling relies on personal experience to guide individuals' choices. Intuition can be a powerful tool in decision-making, especially when there is limited data to analyze information. People rely on intuition to raise certainty in making decisions under uncertainty.
But intuition can also give a false sense of reality.
The approach can be biased, influenced by emotions or past experiences. Intuition can cause one to pass alternatives that could impact the decision outcome.
While intuition can be a useful tool in decision-making, it should be balanced with analytical thinking to ensure well-informed decisions.
To be continued - Stay tuned for Part 2, where we will delve deeper into more decision-making frameworks and provide more insights on how to improve your decision-making skills.