Do you really understand the reason you make decisions?
Sometimes the mind wants to unconsciously push us into a certain decision when there’s a better way to think about it.
That’s the premise of the book, Think Twice: Harnessing the Power of Counterintuition, written by Michael Mauboussin, Chief Investment Strategist at Legg Mason Capital Management and a keynote speaker at IBM’s upcoming Vision 2012 conference in Orlando, May 14-17.
Vision is IBM’s global conference for finance and risk professionals to help improve planning, budgeting and forecasting, identify and mitigate risk, and meet the demanding requirements of XBRL, IFRS, Basel II and Solvency II with greater confidence.
I talked to Mauboussin about his book, making data-driven decisions, some common pitfalls as decision makers, and his upcoming talk at Vision.
“What's very exciting is that in the last half dozen years, we've had a real influx of data, and we're now just learning how to tap that data for the benefit of better decision making,” said Mauboussin. “Now we can create a better intersection between value creation and making decisions.”
The problem however, according to Mauboussin, is that we still have the same cognitive makeup and the propensity to make common mistakes.
“We often think about our own decision making as being objective and fact based and rationale. And we tend to underestimate systematically how important the social context is for our decision making,” said Mauboussin.
To illustrate this point he told an interesting story from his book.
Researchers went into the wine section of a supermarket and set up French and German wines next to each other that were roughly matched in price and quality. Over a two week period they alternated playing distinctively French and distinctively German music to see if it would have any influence on purchase decisions.
Surprisingly, they found when French music played people bought French wine 77 percent of the time, and German wine 73 percent of the time when German music played. When asked if music affected their selections, the consumers unanimously said no.
“This basic experiment can be extrapolated to a lot of organizational settings where we think of ourselves as trying to be conscious and mindful as we make decisions. But indeed what is going on around us can be deeply influential to our decisions,” said Mauboussin.
So what do we do?
According to Mauboussin, integrate more data into quality decisions. However, there is still a tension between the intuitive, go by the seat of the pants experience group versus the analytically-minded group.
“Either extreme is not going to work but a blend between the two is right way,” said Mauboussin.
He then explained about the “expert squeeze” that affects decision makers. On one side are computers and algorithms that are doing jobs quicker, more accurately and cost effectively. On the other side are problems that are complex with high degrees of freedom with lots of possible outcomes.
For instance, there are certain types of tasks that people can learn, internalize and then intuition will work really well, such as chess or hitting a baseball. But, when someone steps into the domains of complexity with numerous outcomes, all bets are off.
This is why Decision Management solutions are reaching a tipping point. By combining predictive models, business rules, scoring and optimization techniques, organizations can generate recommended “next best actions” for each individual customer, citizen, constituent or employee.
“The idea of running every statistic through a persistent and predictive framework can be very helpful in tightening up what organizations do in measuring their own performance,” said Mauboussin. “This doesn't mean experts are going away all together. Humans still need to think about the strategic issues and use the data to inform their decisions.”
And, we haven’t even discussed the role luck and skill play in decision making. You’ll just have to go to Vision to hear more, or read Mauboussin’s upcoming book due out in November 2012, The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing.
However, Mauboussin does offer a few more additional pieces of advice for organizations:
· Focus on the process. While outcomes are what matter, the key is that the proper approach to process is executed faithfully.
· Be very careful of the lessons you learn from history; examine past successes, but also the failures.
· Establish a culture of analytics. Organizations that don't are going to be at a market disadvantage because it's an important source of value creation.
· Ensure that non-financial performance measures are linked to company strategy and ultimate value creation.
· Commit to continual learning. Being able to understand big ideas from various disciplines and cultures can be extraordinarily helpful in problem solving.
For more information:
· Register here for the upcoming Vision 2012 conference
· Download the Vision conference guide for background on keynotes, elective sessions, demos & workshops
· Read a previous blog post on minimizing risk and improving performance