I think I bought this book on a whim. First of all, the cover seemed well-balanced, with the mellow yet impactful 'sky-blue and yellow' background blending in well with the perfectly placed text in the center. The opening chapter was titled 'Crunch time on a Hot August Night', which definitely intrigued me. Usually, I keep a close watch on the list of the best business/strategy books in the market, but this one was clearly out of my radar - even the author's name did not evoke any familiarity. Yet, something in me compelled me to buy it.
In fact, anyone even with a faint acquaintance of business books will tell you that a book on managerial decision-making is quite commonplace. Having an audacious subtitle that reads: How Leaders make Winning decisions, didn't help either. In fact, the Business World is littered with books on this topic that this book could easily pass off as one of those regular ones. However, what differentiates this book from the others is its unusual treatment of this usual topic.
We all know that managerial decision-making comes with its own dirty baggage. In the face of a failed strategy, most of the so-called pundits, in retrospect, attribute it to the leader's over-confidence, arrogance, inexperience or a combination of these. If everything goes well, the leader is praised, or else, blamed. Phil Rosenzweig proffers that strategy decisions are much more complex than lab experiments, and any judgement based on the outcomes of these experiments should be considered inadequate.
Much mischief can be wrought by transplanting the hypothesis-testing logic, which flourishes in controlled lab settings, into the hurly-burly of real-world settings where ceterus paribus never is, and never can be, satisfied - Philip Tetlock, Psychologist
If you think about it, the complex decision-making in the real world has many characteristics which are very different from the laboratory experiments conducted under controlled environments. For example:
- Many decisions involve much more that choosing from options we cannot influence or evaluations of things we cannot affect.
- Many decisions have a competitive dimension. It's not enough to perform well in absolute terms, but to anticipate the movements of the rivals.
- Many decisions take a long time before we know the results - the feedback is not instantaneous.
- Many decisions are made by the leaders of the organizations; they have to extricate themselves from the role of being an individual and act as someone who is looked upto by the others.
Phil wants to remind us that under such complex circumstances, winning decisions combine two very different skills - left brain, right stuff. Left brain is strongly associated with logical reasoning and problem solving. He says, Great decisions call for clear analysis and dispassionate reasoning. Using the left brain means:
- knowing the difference between what we can control, and what we cannot, between action and prediction
- knowing the difference between absolute and relative performance, between times when we need to do well and when we must do better than others
- sensing whether it's better to err on the side of taking action and failing, or better not to act; that is, between what we call Type I and Type II errors
- determining whether we are acting as lone individuals or as leaders in an organizational setting and inspiring others to achieve high performance
- recognizing when models can help us make better decisions, but also being aware of their limits
These factors are important, but they're not enough. Additionally, Great decisions demand a willingness to take risks, to push boundaries and to go beyond what has been done before. Phil calls it the right stuff, which is all about the intelligent management of risk. Having the right stuff means:
- summoning high levels of confidence, even levels that might seem excessive, but that are useful to achieve high performance
- going beyond past performance and pushing the envelope to seek levels that are unprecedented
- instilling in others the willingness to take appropriate risks
Left brain and right stuff may seem like opposites, but they're complementary. For many decisions, they are both essential. Great decisions call for a capacity for considered and careful reasoning, and also a willingness to take outsize risks.
Real-world decisions demand the combination of left brain analysis and right stuff ambition
This book is divided into 12 chapters. It starts with some context-setting where Phil introduces the readers to a typical example of organisational decision making - competitive bidding - the high pressure, high risk scenario where the feedback is not instantaneous, the performance is relative, and the reward is highly skewed. The rest of the chapters try to deconstruct this situation into smaller elements, every subsequent chapter adding an new dimension to the art of making winning decisions.
Let's jump in and look at some of the highlights from the book:
- The first key to making great decision is to differentiate if we are making a decision about something we cannot influence, or can we exert control. When it comes to events like predicting tomorrow's weather or throwing a dice, where we do not have any control over the outcome, there is little benefit from positive thinking or optimism. However, in the case of decisions or activities like sports or preparing for an exam, research suggests that a positive perception can impact the outcome. When we can influence outcomes, positive thinking - even holding views that are somewhat exaggerated - can be beneficial.
- The second key to making great decisions is to know if we're trying to do well, or if we need to do better than rivals - that is, to differentiate between absolute and relative performances. Adding a competitive dimension makes things much more complex, especially because, the payoffs are quite skewed in most fields. What is sensible when performance is absolute may be suicidal when performance is relative and payoffs are highly skewed. As a general rule, the greater the skew, the more important it is to outperform rivals - and the more extreme chances you should be willing to take.
- When we think about strategic management, in most cases, the executives can influence outcomes, and performance is not only relative but highly skewed. In this situation, one thing is assured: playing it safe will almost guarantee failure; willing to take bold action is a necessity. In fact, the failure to act is a far greater sin than taking action and failing, because action brings at least the possibility of success, whereas inaction brings none.
- What we usually loosely refer to as overconfidence has more depth to it than we may think. Overvonfidence in general is linked to a greater confindence than circumstances warrant. Phil notes that overconfidence is a common explanation any time something turns out badly. Unfortunately, we will never learn from the errors of others if we attribute them to overconfidence (most people don't think they suffer from overconfidence).
- Overconfidence, though a single word, has been used to mean three very different things, namely, overprecision, overestimation and overplacement. Overprecision is the tendency to be too certain that our judgement is correct - the tendency to believe a prediction is more accurate than it turns out to be. Overestimation, the second kind of overconfidence, is a belief that we perform at a level beyond what is objectively warranted - it is an absolute evaluation that depends on an assessment of ourselves and no one else (when we believe we can complete a task in a shorter period of time than we can, that's overestimation). Overplacement, the third kind of overconfidence, is a relief that we can perform better than others. You could call it the superiority bias, and it's a pervasive error.
- What IS the best level of confidence? An amount that inspires us to do our best, but not so much that we become complacent, or take success for granted or otherwise neglect what it takes to achieve high performance. However, determining the right level of confidence of confidence demands more than a simple comparison to past achievements. We need to consider whether we can exert control over outcomes and also the nature of competition. When we can influence outcomes, it can be useful to hold opinions that are somewhat inflated - that is, to overestimate. Additionally, in competitive situations (like sports), not only is an exaggerated level of confidence just useful, but it can be essential.
- Apart from overconfidence bias, we also need to look at the base rate bias. When people make judgements under uncertainty, they tend to focus on the case at hand, and overlook the composition of the broader population - they should stand back and consider the larger context and develop a basic understanding of conditional probabilities.
- Recognizing to consider base rates is only the start. Knowing which base rate to use (in real life scenarios, the base rate will not be a given, or fixed) is equally important. If you take an exaggerated view of your skills and motivation, you end up making forecasts on the inside view, which ignore the experiences of others who have attempted similar tasks, often resulting in wildly optimistic forecasts. The way to curb this is by looking at the outside view by considering the past history of similar events. Managers are therefore advised to seek a healthy dose of optimism, and for our purposes, a healthy dose of optimism should take into account both the ability to influence outcomes as well as the nature of performance.
- Great outcomes surely involve some risk, but there are often ways to manage risk and reduce it to acceptable levels. In short, we need to engage our capacity for analysis - left brain - as well as be daring - right stuff.
- Gaining expertise is not the same as amassing experience, and the key to building expertise is deliberate practice (action, feedback, adjustment, and action again). However, deliberate practice is well suited to some activities but much less to others. For sequential decisions that provide clear feedback, deliberate practice is a clear differentiator - we can err on the side of taking action, monitoring results, and then make adjustments and try again. However, when circumstances are different - when decisions are large, complex and difficult to reverse - the premium is on getting this decision right. Rather than err on the side of taking action that may be wrong (but that can be corrected rapidly), we may prefer to err on the side of caution and avoid a mistake with devastating long-term consequences.
- In addition to all of the above, there is a social dimension to the decisions made by a leader or a manager. To understand winning decisions, we have to appreciate what's distinctive about the role of a leader. At it's core, leadership is about mobilizing people to achieve a purpose. In such a context, we need to understand questions like - where does transparency end, and deception begin, what is the boundary between authenticity and manipulation. Leading others to be successful in a moment of extreme difficulty calls for an unwavering spirit. When a very high level of confidence is essential to inspire people to succeed, it's really not excessive at all. It's necessary. And getting people to believe they can perform at that level is a supreme act of leadership.
- Business leaders gain nothing by showing uncertainty and indecision. The team knows that they can't win unless the leader believes they can! Inspiring people to accomplish the impossible is part of the role of the leader, particularly in an industry where competition is intense and constant innovation is required. At this juncture, we should move away from thinking about authenticity as an essential quality in a leader to sincerity. Remember, leadership is not a series of discrete decisions, but calls for working through other people over long stretches of time. It is not transactional, but transformational. As long as the leader is being sincere to a higher purpose, he/she may at times communicate less than the full truth or withhold information that could be disheartening or lead to defeatism. That is one of the responsibilities that befalls a leader.
- Decision science, in recent times, have become increasingly dependent on data models. Models are accurate because they avoid common errors that plague humans; they are more reliable and give repeatable results; they can also handle copious amounts of data accurately and reliably. Research suggests that models can even work well for seemingly subjective rakes, like doing a better job at predicting the quality of wine than a connoisseur. But if you closely look at the kinds of predictions where models excel in, you would find that those are all about something that could not be directly influenced (like the likelihood that a given loan will be paid off on time). A model can predict the rainfall and days of sunshine on a given farm in Central Iowa, but it can't change the weather. It can estimate the quality of a wine vintage, but it won't make the vine any better. For these sorts of situations in which our aim is to make an estimate of something we cannot influence, models can be enormously powerful. In other cases, where the individual/team can influence the outcome, it makes sense to be a bit wary of the model. For example, the model doesn't strike the ball; the golfer holding the club does! Phil points out that this distinction is simple, but it's crucial and often overlooked.
- If you are in a position where you can influence the outcome, you need to constantly switch back and forth between the two mindsets - implemental and deliberative. Implemental mindset is all about getting things done - being in the moment. If you are a batter in baseball, while facing the ball, you need to be in an implemental mindset - hitting the ball is your topmost priority at that point in time - which needs presence of mind and high self-confidence. Once you hit the ball, you switch to a deliberative mindset - what happened during my last time at bat? Are my mechanics sound? What is the pitcher likely to do? What adjustment should I make for the next time? Then, when next standing in at the plate, deliberation gives way to implementation. Now, thinking that you can succeed is vital: believing that you can and will succeed now, against this pitcher.
- Decision models can be very accurate at predicting things we cannot influence. For the person who actually has to get things done, models are far from sufficient. There is also a third category between direct and no influence: indirect influence. If the model's prediction is communicated in a way that changes someone's behaviour, we may still be able to shape outcomes. Indirect influence can take 2 forms. If it increases the chance of an event occurring, that's a self-fulfilling prediction. If it lowers the chance of an event occurring, that's a self-negating prediction. For example, a bank that uses a model to review loan applications ends up rejecting an application based on the applicant's behaviour. If, instead of rejecting the application, the banker calls up the applicant and explains the reasons for the bank's concern, that intervention could cause the applicant to alter his/her behaviour - perhaps, devising a monthly budget or even asking the employer for an automatic deduction from earnings so as to avoid the possibility of missing a payment. In this case, although the model is aimed at predicting an event it cannot directly influence, it will have exerted an indirect influence - a self-negating one.
- The efforts at persuasion or indirect influence will be most effective when they are able to disguise their true intentions - that is, they appear to be purely objective and impartial.
- Understanding the uses and limits of decision models will help us realise that in some cases, we can incorporate new information into our models through a process of Bayesian updating. Thinking of our models as works in progress, continually updated to become more accurate over time, makes good sense.
- In a competitive arena, where managers can shape outcomes, the only way to succeed is to take calculated risks - not just risks that lend themselves to precise analysis, taken out to several decimal points, but risks that are understood in broader brush strokes. Only those willing to take large and even outsize risks will be in a position to win.
- When we can exert control, when we must outperform rivals, when there are vital strategic considerations, the greater real danger is to fail to make a bold move. Acquisitions always involve uncertainty, and risks are often considerable. There's no formula to avoid the chance of losses. Wisdom calls for combining clear and detached thinking - properties of the left brain - with the willingness to take bold action - the hallmark of the right stuff.
- More often than not, far from suffering from an illusion of excessive control, we may fail to appreciate the control we have and underestimate our ability to sharpe and transform. Starting a new new business involves many of the same elements we have seen in other winning decisions: an ability to distinguish between what we can control and what we cannot; a sense of relative performance and the need to do better than rivals; the temporal dimension, in which decisions do not always produce immediate feedback; and an awareness that decisions are made in a social context, in which leaders sometimes need to inspire others to go beyond what may seem possible. Together, these elements help new ventures get off to a winning start.
In short, winning decisions call for a combination of skills as well as the ability to shift among them. We may need to act first as a psychologist, then as a tactician, next as a riverboat gambler, and perhaps, once again as a psychologist. In the real world, where we have to respond to challenges as they arise, one skill or another is insufficient; versatility is crucial. Even then success is never assured, not in the competitive arenas of business or sports or politics. Performance is often relative and consequences of failure are harsh. A better understanding of decision making, however, and an appreciation for the role of analysis as well as action, can improve the odds of successs. It can help us win.
It's a bit disturbing that, as the author of this post, it doesn't make me feel even a bit guilty that most of the content in this post is a direct reproduction of the book. My objective with this blog was to distill the book into a shorter version, while keeping its gist in tact. I feel happy having accomplished that to a great extent. Like I mentioned in the beginning, this book was an impulse purchase - but it was one of the best decisions of my life! I wanted to share it with you all.
Let me conclude than with this quote from David Spiegelhalter (Winton Professor, Cambridge University):
This book is a needed reality-check on the standard dogma of decision-making. Essential reading.