As leaders, entrepreneurs, and product managers, we are frequently confronted with decisions such as these: What is the right market for us to focus on? Should I prioritize this project? Should I give this initiative my support?
I recently read the book Decisive, by Chip Heath and Dan Heath. The authors identified three decision traps that get in the way of us making effective decisions.
- Narrow framing: you only look at the options immediately presented to you, and therefore you miss potentially good options.
- Confirmation bias: you gather self-serving information that further entrenches your perspective, and may lead you down the path of a poor decision.
- Overconfidence: you think you know more about how the future will unfold than you actually do. A corollary is that you believe your chances of success are much higher than they actually are.
To address each of these decision traps, the authors provided these suggestions.
- Widen your options (to fight narrow framing)
- Reality test your assumptions (to fight confirmation bias)
- Prepare to be wrong (to fight overconfidence)
Let’s examine each of the components of this framework in more detail.
Widen your options
In 1994, the CEO of Quaker, William Smithburg, decided to acquire drink maker Snapple for a stunning $1.8 billion. The acquisition failed. Three years later, Quaker jettisoned Snapple for $300 million (one-sixth the acquisition price) and Smithburg resigned. The CEO fell victim to one of the decision traps: making a “whether or not,” narrow frame decision.
How often do we find ourselves faced with a “whether or not” decision? Paul Nutt, a professor at the Ohio State University business school, analyzed that question using data from business decisions made by real teams. He found that 71% of business teams (which included the CEO or COO as a decision maker) only considered one alternative when making business decisions — they were making “whether or not” decisions. However, Nutt found that “whether or not” decisions failed 52% of the time, whereas decisions that considered two or more alternatives only failed versus only 32% of the time.
According to this study, additional options beyond a single “whether or not” option moved the failure rate down from 52% to 32%.
So what can we do to widen our options and avoid using a narrow frame?
- Force yourself to explore other options. First, step back from a “whether or not” decision, remind yourself of your ultimate goal, and ask yourself if there are other options that may get you there.
- Think about opportunity costs. Any decision we go forward with will involve costs — time, money, effort, attention. What else could we be doing if we saved those costs? Often the answer to that question provides the other options to widen your frame.
- Try the Vanishing Options test. Ask yourself, “What would I do if I couldn’t take the option in front of me?” This forces you to think outside of your current options.
- Multitrack. Consider more than one option simultaneously. This helps you improve your understanding of the shape of the problem; synthesize the best features from multiple options you’re considering; and helps you keep your ego in track (you won’t be attached to a single option).
Reality test your options
In public markets, the average premium that a company pays to acquire another company is 41%. In other words, if a company’s market cap is $100 million, then the acquirer will pay $141 million for the company, a very hefty premium. Why do acquiring CEOs often pay so much to acquire the target? One reason, according to a study by two business school professors, is confirmation bias. CEOs seek out more news and evidence to support paying the premium price, rather than the disconfirming evidence to pay a lower price or reject the deal. Nobel Price winner Daniel Kahneman wrote about the risks of confirmation bias in Thinking, Fast and Slow.
So what can we do to reality test our assumptions and avoid confirmation bias?
- Spark constructive disagreement. Make it safe for others to disagree with you. You need to have a willingness to change your mind; support diversity within your team; and foster the psychological safety for people to speak up. You can also ask this question: “What would have to be true for this option to be the very best choice?”
- Ask disconfirming questions. When you are leaning towards favoring a decision, seek out the reasons why it would not be the right choice. Reid Hoffman, in a talk that he recently gave at a Greylock event, recounted what he did when he first came up with the idea for LinkedIn. “I went around to all of my smart friends and asked, ‘What’s wrong with this idea? Why won’t this work?’” He pressure tested the product idea for LinkedIn by asking people to tell him why it won’t work.
- Trust the outside view. In many cases, we only seek out information that is immediately available to us to evaluate our specific situation. This includes what we ourselves have experienced, what we ourselves have seen or heard. This is called the “inside view,” and many times this information is wrong because we ignore the averages. The “inside view” leads us to think we are special, that we will succeed where others have failed. The “outside view,” by contrast, considers the averages. On average, how have people in our situation fared? This requires us to “zoom out,” and learn what happens to people in this situation on average.
Prepare to be wrong
In 1981, a team inside Eastman Kodak, the photographic film company, assessed the threat to its business from digital photography. The team concluded that, “The quality of prints from electronic images will not be generally acceptable to consumers as replacement for prints based on the science of photography [i.e., film].” This confident prediction proved to be true through the 1980s and 1990s; however, starting in the 2000s, digital photography began to take off. The rise of smartphones and the increasing quality of digital photography marked the death knell for Kodak, which filed for bankruptcy in January 2012.
What can we do to prepare to be wrong, and avoid falling victim to overconfidence?
- Bookend the future. Don’t just forecast a single point outcome (which will often be biased towards the high end due to overconfidence). Instead, use “‘bookending,’ which involves estimating two different scenarios: a dire scenario (the lower bookend), where things go badly for the company, and a rosy scenario (the upper bookend), where the company gets a lot of breaks.” By thinking through the extremes, we have a better sense of the range of possible outcomes — and we can plan for the downside outcome (lower bookend).
- Prepare a pre-mortem. Actively plan out for the scenario where things do wrong. Ask yourself the question, “It’s a year from now. Our project has failed. What went wrong?” By doing a pre-mortem, you will again be forced to look at the downside scenarios and risks, and you may identify actions you can take today to mitigate those risks. Or you may look at the downside scenario and risks identified in the pre-mortem, and abandon the project.
- Set a tripwire. Before you move forward with a decision, identify the situation which would cause you to revisit the decision or take corrective actions. For example, the tripwire could be, “Once our costs for this project grow to $50,000, we need to get back together and look at whether the ROI still makes sense.” If Kodak had set a tripwire for digital photography (i.e., “once the number of digital cameras purchased grows to 5% of traditional film cameras, we need to make a bold response”), they may have been able to respond to the growing threat of digital.
In this post, I synthesized the key take-aways from the book Decisive, by Chip Heath and Dan Heath. We discussed multiple examples of decisions that went wrong — including Quaker’s disastrous acquisition of Snapple, and Kodak’s overconfident prediction that digital photography would not hurt traditional film sales.
The authors identified three important decision traps that people often encounter:
- Narrow framing
- Confirmation bias
In order to overcome these three decision traps, the authors recommended three different approaches:
- Widen your options (to overcome narrow framing). This includes analyzing your opportunity costs and multi-tracking — evaluating multiple options at the same time.
- Reality test your assumptions (to overcome confirmation bias). This includes sparking constructive disagreements on your team, and seeking disconfirming evidence.
- Prepare to be wrong (to overcome overconfidence). This includes bookending the future and setting a tripwire.