Just Because Your Outcomes are Great, Doesn’t Mean Your Decisions are
Have you ever looked at a competitor and wondered how they seem to always be making the right move at the right time? Do you question how they can always be one step ahead in delivering innovations and making decisions that you would never have imagined making? Do they have data you don’t? Do they have a consultant guiding them?
Every decision that is made has a portion of luck in whether the outcome is positive or not. Sometimes the luck will run with you and some piece of information or context you didn’t have will work in your favour. Sometimes it will run against you and there will be something you didn’t consider that works against you and creates a negative outcome.
Looking at your competitors and becoming concerned with their ability to win market share and make the right calls you may be tempted to learn more about how they are making their decisions and what information they have that you don’t. But what if their process is actually terrible and they are merely incredibly lucky?
Lord Timothy Dexter
Timothy Dexter was born in America during the 18th Century, 1748 to be precise. He made profits from several export products; coal, bed pans, and gloves. Looking at these profits you would be right to say he was an astute businessman who could quickly identify and exploit market opportunities. Maybe in today’s world he would have been the one to make money from being first on the fidget spinner craze. You could be tempted to study his methods with a view to adopting his process, much as people study the methods of Benjamin Graham and Warren Buffet when looking to invest in shares.
It will start to give you a picture of where this story may be going if I tell you that the one book Mr Dexter wrote lacked any punctuation. Indeed upon being advised that his masterpiece, “A PICKLE FOR THE KNOWING ONES;
or Plain Truths in a Homespun Dress” (sic), lacked punctuation a second edition was released with a page of punctuation and instructions to distribute as necessary.
How could a person incapable of writing a proper sentence be capable of such fantastic decisions in business?
The answer, of course, is that he was capable of fantastic outcomes, but not fantastic decisions. Taking them one by one:
- Coal — In the 18th Century Newcastle, UK, was the coal capital of the world. Indeed there was even a pharse at the time “to carry coals to Newcastle” that represented a pointless action. Nevertheless Timothy Dexter put six ships full of coal on the water to Newcastle. Those who had advised him to make such a move, a joke at his expense, waited for their punchline to drop and his losses to be accounted for. As the ships were working their way across the Atlantic ocean a miners strike swept through Newcastle. The ships arrived to a town starving of coal, resulting in making a sale of coal for a premium.
- Warming Pans — Before central heating or reverse cycle A/C if you wanted a warm bed at night you would place a warm pan under the covers. Great for the cold climates of the Northern States in the US. Timothy Dexter made the call, again under some less than perfect advise, to put a shipment of warming pans on the water to Jamaica. I’m not sure if you’ve ever seen an advert for holidaying in the Carribean, but warm clothing tends to be absent from the visuals. Nevertheless a profit was turned. For you see it appears that the warming pans are the perfect tool for handling mollasses, the primary commodity being produced in Jamaica.
- Wool Mittens — Perhaps bouyed by his prior success in Jamaica, a new shipment of wool mittens was prepared for a similar destination, the South Sea Islands. This time, rather than some fortunate alternate use, the ship came into harbour at the same time as one destined for the colder climes of China. The result. Another bumper profit for his product.
If you evaluated each of these decisions from the point of view of the profit made then you would head down the path of trying to replicate them. But the process was terrible. The outcome was reliant on luck.
Luck or Skill
If a business doesn’t look to reduce the portion of the outcome reliant on luck, eventually the luck would run out. The decision process would result in a loss, or worse. The loss could be viewed as an anomaly and ignored. If it occurs early in the life of the business it should be a small loss. If it occurs later in the journey, after (misplaced) confidence in the businesses ability to make the right call has been built, then perhaps the bad decision undoes everything.
Early in a businesses life the risks are lower, making a decision is more important than making the right one. The runway is hopefully there to recover from small losses, so long as they are learned from. As a business grows the decisions become harder to make because the downside has become larger and the context more complex. Without a solid process this will lead to decisions not being made fast enough or with fingers crossed that the call is the right one, the owner and team holding their breath as it plays out.
The message here is to focus on building out a decision process that seeks to reduce the impact of luck through continual improvement. Each company will have a different process that works for them given their people, culture, and relationship with data. If you can creat certainty in decision making, without stifling the speed and agility of the decision makers, then whilst you may not have good outcomes every time you will win on balance.
For a more in depth look at the interplay of luck and skill you can fins no greater read than “Thinking in Bets" by Annie Duke.
Originally published at effigyconsulting.com.au on December 12, 2018.
