In Jim Collins’ famous book Good to Great (Why Some Companies Make the Leap and Others Don’t), he says, “One of the dominant themes from our research is that breakthrough results come about by a series of good decisions, diligently executed and accumulated one on top of another.”
That begs the question, how does an individual or organization make “good” decisions or conversely avoid “bad” ones? It’s a big question, one that I continually try to explore but in no way feel qualified to answer. One thing that has become clear to me is that my poor decisions are generally rooted in some subtle behavioral blind spot like ego, unknown biases or fear.
If you follow Warren Buffett and his business partner, Charlie Munger, you know they both spend a lot of time talking about how they make decisions. Munger became so fascinated with the topic that he gave a famous speech in 1995 called, “The Psychology of Human Misjudgment” about the ways people trick themselves into making errors of judgment. The full speech can be found on YouTube, but I warn you it’s very long and terribly dry. There is, however, a 15-minute abbreviated and animated version entitled, “Charlie Munger: The Psychology of Human Misjudgment” that is very good.
Here are a few examples from his speech that I have experienced firsthand and/or noticed in some contractors when making business decisions.
Bias from over-influence from authority
We are all at some point influenced by authority figures. Whether it’s a teacher we had when we were kids or an expert in a particular field, such as a doctor or stock broker. The problem is we sometimes blindly take the information they give us as gospel instead of critically thinking about whether we agree.
Munger uses the example of a study in which airline pilots were put in simulations and instructed to do something that would make the plane crash so psychologists could observe the reaction of their unaware copilots. In 25 percent of the cases, the copilot took no action and let the plane “crash” deferring to the pilot authority figure even though there was clearly something wrong.
Ray Dalio, the former CEO of Bridgewater, talks about this concept extensively in his book, Principles. Dalio shares his personal story when he was diagnosed with cancer and his doctor recommended a certain treatment. Dalio began to research his type of cancer and the treatments available, then he consulted with two other top experts both of whom recommended another type of treatment. Based on these recommendations and his own research, he opted for the second treatment option and his cancer was cured. Dalio refers to this as “triangulating decision-making” (i.e. getting a base knowledge of the subject yourself and checking with multiple top experts in the field).
Bias from social proof
This one can simply be described as, “Everyone else is doing it, so I should too.” We see this often with the stock and real estate markets. All the people we know are buying stocks or real estate, so it must be a good idea.
With contractors, this can also happen in more subtle ways. You see your competitors buying certain equipment or expanding geographically, and wonder if you should be doing the same. Munger gives a stark example of when Exxon bought a fertilizer company – something they had no experience in and that had nothing to do with the oil business. Eventually, all their competitors bought fertilizer companies too – none of which worked out well.
Human beings often think in terms of contrast and relativity, which is probably the reason reality TV is so popular, as many of these shows make us feel better about our own lives. Munger gives the example of a real estate agent taking a person to two very overpriced houses and afterward showing them a moderately overpriced house, which then seems like a bargain when in reality it’s still moderately overpriced.
In business, it could mean your company made a 5-percent net profit compared to the industry average that year of 2-percent. That seems great, but what if the true potential for your company was a 10-percent net profit? Was 5 percent really that great? It can be extremely difficult but equally important to think in absolute terms, and we should each come up with our own definitions and benchmarks without relying totally on comparing to others.
It has been shown lotteries that allow people to pick their own numbers get significantly more play, because people subconsciously believe they have influence over outcomes of things that they don’t.
One of the most important things in life is understanding what we can control and what we can’t. Only then do we have an honest perspective and the ability to direct our efforts towards those things over which we have influence. Combating the tricks our minds play on us can be challenging and never-ending. Being aware of these things and our bad habits or blind spots is a helpful first step.
Reading and learning about how other successful people make good decisions is another very helpful avenue. Like anything in life, it takes practice, practice and more practice to make good decisions. Or as someone said once, “We are what we repeatedly do. Therefore, excellence is not an act but a habit.”