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The new buzzwords in decision making seem to be: analytics, science, and facts.
While these are great trends, we must be cautious of the contrary and, often, unconscious factors: bias, denial, and risk. You don’t have to look too far to see this in practice – we all have seen how analytics can bust your brackets.
“I unfollow people when they ask me to think for myself. I mean, who has the time?”
The NCAA basketball tournament. We all watch it. And, we all fill out brackets. Every year, I rely on meticulous reading, analysis, and knowledge to fill out my brackets. Yet, we all have seen how analytics can bust your brackets. I’m a Big Ten fan and my brackets are always busted because I always favor Bigger Ten Teams winning than what actually happens. Now, this is due to several factors: First, I will never pick a reasonable Big Ten team to lose to an elite team I don’t like. Second, I have more knowledge of the Big Ten so I develop more reasons to choose them. Third, I simply deny that they could ever possibly lose!
Thus, it’s easy to see how bias, intuition, and a bit of denial affect my choices…
We all have seen how analytics can bust your brackets. But, these factors play a part in most decision-making processes. Clients are generally great at describing the strengths of their businesses or new ideas. However, when asked about competition, the most frequent answer is similar to having a busted bracket, “We don’t have any.” At a minimum, that ignores the fact that people are currently getting along fine without your product or service. But, most likely, they’re spending money on something else that solves whatever your product or service is aimed at doing. You can be biased and think your product does it better, but assuming you have zero competitors is naive. Additionally, clients frequently pay less attention to challenges and weaknesses. In particular, programs often lack details on how they will generate sales or be profitable.
One of the biggest changes in traditional businesses is the lack of understanding regarding goals and measurement. Like basketball we can analyze the strengths of our team and focus on accounting tools like sales, gross profit, EBITA, inventory turn, R.O.I., present value, etc. However, E-Commerce and Internet business evaluations are based more on growth, execution, and retention. Thus, clicks, conversions, retentions, and interaction are busting the brackets of the more traditional measures. Specifically, in my brackets I give less credit to the three-point shot which enables many upsets. Imagine if traditional businesses gave their major products away for free like Google and Facebook. Another interesting difference is that E-Commerce companies are generally more concerned with quality and trust than traditional companies.
Bias is one of the greatest complications when it comes to accuracy in the scientific analysis of decisions. This includes statistical problems like sampling, measurement, and development of information. For example, assessing Covid accurately is problematic due to varying demographics such as age, race, and other factors that convolute the analysis. In many cases, these can be understood, but are still challenging.
I also believe that social bias can be more impactful than statistical bias. This includes our preconceived perceptions and assumptions. I’m always amazed that many programmed employee selection tools outperform interviews especially in jobs requiring specific skills. In particular, tests remove things like unconscious age, sex, and racial discrimination.
Cultural and environmental factors also affect bias. Dress, demographics, weather, location, and culture all affect perceptions in the decision making process. These can also be used to your advantage in talking to colleagues by increasing bonding with similar people. Whenever I meet someone who is also from the Southside of Chicago, agreement on differences becomes much easier.
Risk is also a critical part of creating denial and bias. Frankly, I believe we all need more risk. We tend to think of it as a taboo concept and it’s really not—once you understand it. In order to benefit from risk, you need to define what risk is to you. Some people view risk as the potential for harm or hazard (think bungee jumping). I view risk as an uncertain circumstance in which one manages to maximize the gains. But, how do you maximize the probability of success?
- Know the value, importance and probability of the reward. Winning the lottery has an extremely high reward, but also has low probability. Purchasing investment bonds has lower return than buying stocks, but the risk and volatility of buying stocks is higher. Understand the perceived importance of the reward. People generally regret losses more than they appreciate gains—and that is a key factor to consider when making any decision.
- Think about your decisions and the outcomes. We often perceive decisions as win-lose situations where one-party wins and another loses, but there are different types of decisions. Changing that mentality to “win-win” can have dramatic benefits and we tend to underestimate the opportunities we have to achieve this.
- Mitigate risk. The best, simplest, inexpensive, and most effective way to mitigate risk is to gather more information. The more you know about making a decision, the less risk it will involve. Other tools include: insurance, diversification, and leverage.
- Risk needs to managed rather than feared. Understanding the risk, the rewards, and the importance of each can help you improve outcomes. Don’t allow fear, uncertainty, or tradition to lower your potential and prevent you from trying something new. Only those who dare to risk going too far can find out how far one can go.
Analysis, statistics, and data can greatly improve decision-making. However, we also need to acknowledge that the parameters, method of analysis, misinformation, sources, and bias can greatly alter results and conclusions. To avoid these traps, try incorporating a “devil’s advocate” in your decision process. Just take a moment to look at things from a different perspective—it might help you see the bigger picture more clearly. Maybe some self-reflection will debunk a previously believed theory or, perhaps, it will strengthen your convictions. Either way, you (and your decisions) will be better for it. We all have seen how analytics can bust your brackets. Let’s see how we can take what we’ve learned from that, and use that knowledge to help us make better decisions when running out business.