Chapter 22: MAKING RATIONAL DECISIONS

 

Chapter 22: MAKING RATIONAL DECISIONS 

•   Making rational decisions involves using a logical and systematic approach to evaluate options and choose the best course of action.

•   Good decisions are crucial to a successful and fulfilling life. It is true that many decisions can be made quickly without much thought. But if we are not careful, hasty decisions about careers, relationships, or investments can ruin our life.

•   Many people make decisions based on feelings. “I knew I wanted to marry her the moment we met.” 

•   But sometimes our feelings are mixed and inconsistent and affected by biases and irrelevant factors. For important decisions, we need a better system. This is not to say we should ignore our emotions. It would be unwise (and sad) to marry someone without regard for feelings. But emotions and feelings should not be the only basis for making important decisions.

•   So what makes a good decision? Some people think a decision must have been well made if it has a good outcome. This is dangerous because a bad decision can have a happy ending by accident, but you cannot count on being lucky all the time. Instead, we should focus on the reliability of the decision process itself. This is the thinking process that produces the decision. A reliable thinking process does not guarantee that every decision will have a good outcome. What it does is make good outcomes more likely, which means fewer costly mistakes. 

1.      A GOOD DECISION PROCESS

The basic outline of a good decision process is as follows: 

•     Think generally about how the decision should be made. 

•     Do some research. 

•     Come up with a list of options. 

•     Evaluate their pros and cons and pick the best option. 

•     Prepare for contingencies. 

•     Monitor progress and learn from the results. 

•     Step 1: Think generally about how the decision should be made 

•     Modern life is fast-paced and we are always under pressure to make quick decisions. But hasty decisions might mean spending more time and money to deal with the bad consequences later. So before making up your mind, think generally about your task. As the American philosopher and educator John Deweyonce said, “A problem well stated is a problem half solved.” Here are some relevant questions to ask: 

•     Can I delegate? Why burden yourself if other people can make good decisions on your behalf? Of course, if you always defer to others, you will not learn to think independently on your own.

•     How much time should I spend thinking about this? Life is too precious to be spent worrying about trivial things. Over-drinking is as much a sin as not thinking enough!

•     What is the central issue? Which is the most important decision? Some decisions depend on others, and the more basic decisions should come first. For example, before deciding how to invest your money, you should first decide how much to invest and how much risk you can take.

•     Is there anything that might have a negative effect on my decision? Decisions can be biased. Think about whether there is anything in the current situation that might affect your objectivity. Making major decisions when you are being emotional is usually not a good idea. Postpone the decision if you can, or execute the decision later when you are calmer. 

•     Step 2: Do some research 

•     Information usually helps us make better decisions. Think of shopping in the age of the Internet. Before you buy an expensive item, it is a good idea to check online reviews and compare prices. You might find a better deal elsewhere or come across something even better. 

•     You can start by doing some research: find out whether other people have been in a similar situation, and see what you can learn from them. If your decision involves a special area of knowledge, you can read more about it.

•     It is a good idea to do a SWOT analysis before making a major decision. SWOT is an acronym for strengths, weaknesses, opportunities, and threats. These four factors are used to analyse an individual or organisation. 

•     When a company is deciding how to expand its business or face off competitors, it might start with a SWOT analysis. But the SWOT method is also useful for individuals. Many people live busy life with little time for reflection. SWOT is a useful tool we can use now and then to step back and review where we are in life and where we want to go. 

•     Step 3: Come up with a list of options 

•     List all available options—that is, all the realistic action plans that can be pursued. If you are trying to decide where to go for vacation, you should make a list of the activities and places you are interested in, such as snorkelling in Malaysia, hiking in Nepal, or skiing in New Zealand. In making such a list, we should pay attention to the following points:

•     Feasibility and likelihood of success: Are the action plans realistic? Do any of them violate any given constraints (too expensive, takes too long to implement, illegal, and so on)? 

•     Adequate choices: People are busy and many decisions have to be made quickly. On one hand, we should think really hard so that there are genuine alternatives to choose from. On the other hand, having too many options to consider can be confusing, and it can become difficult to evaluate each option adequately. 

•     Exclusive vs. complementary alternatives: Some plans exclude others. If you have a limited budget, buying a car means you cannot renovate your apartment. But some plans complement each other. You can improve a product by better marketing, providing discounts, and improving quality, all at the same time. So always see if you can combine good options. 

•     Step 4: Evaluate the options and pick the best one 

•     When we have a set of options available to us, it is time to pick the best one. But what counts as "the best"? There is no single correct answer because it depends in part on your values, priorities, and risk appetite. 

•     What we should do when we make decisions is to list the pros and cons of each option available to us (the reasons supporting the option and the reasons against it). We then pick the option that on balance has the most reasons in its favour. Call this the Benjamin Franklin method. Franklin (1706-1790) was one of the Founding Fathers of the United States, a famous politician, businessman, printer, scientist, and inventor. In his letter to the scientist Joseph Priestley, he suggested that many decisions are difficult because we do not have all the relevant information before us. One thing we can do is to write down the pros and cons of an option in two columns.

•     Here is an example. Suppose you are looking for work and you have three options: join a large stable company or an exciting small internet startup. Or maybe borrow money and set up your own business. We can then write out the pros and cons of each option in a table: 

Option	Pros	Cons
Join big company	Good pay Stable job Generous health benefits Lots of holidays	Less interesting work Rigid company culture
Join startup	Exciting work Big potential payoff Valuable experience	Long hours Relocate to a different city Demanding boss Uncertain prospects
Start own business	Be my own boss Exciting  Valuable experience	Must borrow money Lack of experience Untested business plan

 

•     If you simply count the pros and cons, it might appear that option 1 is the best (4 pros minus 2 cons = 2 net pros), option 3 ranks second (3 pros and 3 cons), and option 2 is the worst. But as Benjamin Franklin pointed out in his letter, the pros and cons can have different weights in the sense that some considerations are more important than others. If you are young and have just finished university, you might give a higher priority to gaining new and exciting experiences. Perhaps you would not mind working very hard and taking a risky career move, as long the potential return is high. So joining the startup might be the best choice. But if you are 10 years from retirement and have a family to look after, it is understandable that you might want to be more conservative and prefer the first option instead.

•     Step 5: Prepare for contingencies 

•     Murphy's law says: If something can go wrong, it will. Accidents happen despite our best planning. The projector might stop working during a presentation. Your printer can run out of ink just when you have to meet an urgent deadline. Good planning helps you anticipate problems and minimise their damage. Li Ka Shing is a successful Hong Kong businessman with a net worth of about US$21 billion. He was the 14th richest person in the world in 2010 according to Forbes magazine. He said risk management is a crucial part of his success, and that he spends 90% of his time thinking about the worst possible problems that might affect his business. How much time do you spend thinking about potential disruptions to your plans? Here is a list of things to consider in contingency planning: 

•     Anticipate problems: List 10 bad things that might happen and think about what to do in these cases. Think about the worst possible scenario.

•     Strengthen the weakest link: The weakest link is the most vulnerable part of a project and can most easily undermine the success of the whole.

•     Include a safety margin: Predictions about the future are notoriously inaccurate. Have a flexible plan that tolerates inaccuracies in your predictions and assumptions.

•     Prepare a backup plan: In case the original one fails miserably. 

•     Step 6: Monitor progress and learn from the results 

•     Monitor how the decision is implemented to see if any follow-up is needed. You might have already decided where to go for vacation, but did your travel agent remember to book the tickets for you? Is there any news about your destination (for example, epidemics, earthquakes, strikes) that you should know about? Do you need to execute your backup plan instead?

•     More important, even when the whole project has been completed, we should review the process to see what we have done right or wrong so that we can do better next time. For example, when we make investment decisions, we should keep records and write down the reasons for our decisions so we can review our successes or failures. 

•     Human beings are prone to be overconfident and they often forget about their own mistakes. But as the philosopher George Santayana said, “Those who refuse to learn from history are condemned to repeat it.”   

2.      EVALUATING DECISIONS: A SUMMARY

•     Here are the main elements in our decision process: 

1.       A definition of the decision that has to be made. 

2.       A list of the options available.

3.       A list of the pros and cons of the options.

4.       A set of criteria for the best option. 

5.       A conclusion identifying the best option according to the criteria.

•     A good decision process requires all five parts being implemented correctly. Use the following checklist to see if any mistakes have been made:

1.       Is it clear what we have to decide? Which is the most important or urgent decision? Meetings or discussions can go on forever without any decision being made. At some point, we need to refocus on the main issue.

2.       Are all the options realistic? Are there other options we should consider? Many people rely on what they are most familiar with. Or they stop looking for options when they think they have the right answer. Thinking creatively and expanding our options can often lead to better alternatives. 

3.       Have we overlooked any good/bad consequences of an option? Failure to identify the important consequences of an option can undermine the whole decision process. Solution: more thinking, more research, more discussion. 

4.       Is there any special criteria for the decision we should be aware of? This part of the decision is often implicit. But sometimes there are special criteria the best option has to satisfy—for example, it has to be one that the boss will approve, it has to fall within a given timeframe and budget, it should minimise risk. Any such criteria should be made explicit. 

5.       Have the criteria been applied wrongly? People can agree about the decision criteria and the options but still, disagree about which is the best option. Maybe someone picked the wrong option because she was careless. Or maybe she misunderstood the nature of an option. But sometimes it is difficult to balance the pros and cons qualitatively. We cannot always resolve such disagreements. The best way to proceed is to lay out the differences as clearly as possible. 

3.      TYPICAL PROBLEMS IN DECISION MAKING

•     Apart from the five issues discussed previously, there are also psychological biases and problematic attitudes that affect the reliability of our decisions. Here are some of the more pervasive ones we should avoid: 

•     Plunging in: This is the problem of making decisions too quickly. Very often people make quick decisions because they trust their intuitions. In any case, we should objectively verify whether our intuitions are reliable.

•     No system: We can make bad decisions even after a lot of thinking. This can happen when the thinking is messy. Sometimes people think about irrelevant or unimportant issues, or they are not able to organise information systematically, which makes it difficult to evaluate the options available. Again the solution is to follow the system here and structure the whole decision process accordingly. 

•     Decision paralysis and procrastination: Decision paralysis is the inability to make up one's mind. Procrastination (hesitation) is needlessly putting off tasks that have to be done promptly. Their causes vary greatly—perfectionism, fear of failure and uncertainty, and so on—but the result is lower productivity. It is important to understand their psychological sources and find realistic ways to cope with them.

•     Failure to execute: Sometimes we have no trouble reasoning about our decisions but we fail to implement them. We might be lazy, or forgetful, or our emotions get the better of us. Many addicted gamblers know they should avoid gambling, but when they are in a casino, they are overwhelmed by the thrill and their own compulsion. 

•     Overconfidence: Most people overestimate their ability. This is bad for decision-making because it means people think less about the different aspects of the decision and how things can go wrong. 

•     No learning: Many people are poor decision-makers because they fail to learn from past mistakes. Learning from experience is important, and this includes understanding our strengths and weaknesses. 

•     Sour grapes mentality: This is a matter of changing one’s values and objectives solely to make oneself feel better about the outcome of a bad decision. Suppose you are trying to decide whether to buy a mobile phone model A or model B. You did not do your research properly and bought model A on impulse and are now regretting it. So you try to convince yourself that you actually like A better than B. Of course, there is nothing wrong with changing your mind, or even changing your mind to make yourself feel better. What is wrong is to let rationalisation becomes a habit, to the extent that we do not learn from our mistakes and fail to improve our thinking. 

•     Obsession with sunk costs — Sunk costs refer to time, money or other resources that have been spent on a project and that cannot be recovered regardless of one's decisions. Economics suggests that they should be ignored in future rational decisions. Yet people often think: “I cannot give up now because I have committed so much already”. This is even when giving up is likely to bring more benefits. For example, a person might cling to an unfulfilling relationship, although it would be better for him to put an end to it right away. Or someone might have put a lot of money into a failing investment, and continues to do so even when abandoning it would be more rational economically. There are many reasons why we overemphasise sunk costs—sentimentality, wishful thinking, fear of failure, and so on. But the problem is that we end up foregoing better opportunities. 

4.      VISUALISING DECISIONS

•     The following diagram tells us whether to go jogging depending on the weather: 

 

•     These diagrams are more useful when dealing with complicated decisions. They can also be used to map out the reasons for and against the different options, and their various consequences.

END OF THE PART