A Bad Outcome Doesn’t Mean A Bad Decision
Every now and then, the business world offers moments of startling clarity. In these moments, where a founder “bets the company” or a rival makes a winning strategic move, you can understand the impact of decisions. Some decisions, like the design choices around the iPod, are clearly wonderful. Other choices, like the rollout for New Coke, are not so great.
Or actually, the choice to introduce New Coke was perfectly reasonable. It was a good decision. Faced with their situation at that time, with a flagship brand stagnating against rival upstart Pepsi, the company understood and vetted a number of options and took what was, on the surface, the best one available.
But not immediately. Long before the decision was made, Coca-Cola began with market studies, consumer preference testing, focus groups, and more. For two years, “flavor engineers” experimented with recipes, developing what would become an empirically better drink as measured against the “sip test”.
Then came the infamous results. The new drink was brought to market in 1985. The outcry from customers was immediate. In some cases, it was hysterical. To many people, Coca-Cola had somehow betrayed the public. There was confusion everywhere. Were consumers losing a hallowed brand? Does New Coke mean that no one will ever be able to get Classic Coca-Cola again? And then there was the quality issue. The fact that the new drink tasted better in one sip didn’t mean it tasted better in a 12-oz can. It tasted worse in the can. It was too sweet. All this created a storm of anger. The media picked up the reaction and spread the story far and wide, fueling more reaction, more anger, and a pseudo-black market for the original Coke.
Clearly, the outcome did not play out as expected.
Coca-Cola recognized the situation immediately, listened to their customers, and pulled New Coke from the shelves after just three short months. This, as it turns out, was another good decision. The return of Coca-Cola Classic created a real resurgence for the brand and, all these years later, the company remains the dominant figure in the industry.
But the shadow of New Coke looms large. As both a cautionary tale and a chance for some armchair quarterbacking. In the twenty-three years since, Coca-Cola’s effort has been perpetually cast as “One Of The Worst Business Decisions Ever Made.”
Murphy’s Law: Good Decision, Bad Outcome
I think there’s some confusion here. It gets to an important point from this week’s book, Thinking Fast and Slow. From our author, Daniel Kahneman, we have the following:
People will become better decision makers when they expect their decision to be judged by how it was made, not only by how it turned out.
Decisions and outcomes are related, of course, but decisions do not determine outcomes. A good decision can still yield a bad outcome, a mediocre outcome, etc. More important, a bad decision can still yield a good outcome and still be a bad decision.
This is best-illustrated in poker. In fact, poker champion Annie Duke has a marvelous book on the very concept called Thinking In Bets. It comes down to probablistic thinking. Imagine you are at the table and receive a mediocre poker hand. It’s a low pair that has low-to-middling probabilities for success. Depending on your style of play, there is a right decision at the initial point of this hand. And yet, as every poker player knows, the “right” decision still doesn’t guarantee success. In fact, I’ve seen some of the best poker players in the world lose their entire chip stack even when they’ve played their hand perfectly. Because, well, murphy’s law.
Meanwhile, “beginner’s luck” in poker is very real. Many people have stumbled their way into a victory while misplaying most of their hands. Bad decisions all the way around and still good outcomes. It’s the sort of thing that makes poker both astonishing and infuriating.
Players understand how to play a hand in poker because it’s a clean, relatively simple game with finite outcomes and easily-measured probabilities. Business is a game, too, but not as easily analyzed on the front-end. Managing the uncertainty requires careful hedging, analysis, and a playbook of several next steps. Reversibility in a decision is highly-valued so that bad decisions don’t beget more bad decisions.
Trust The Process
There’s a lot there and we’ll save that for another day. For now, simply embracing Kahneman’s wisdom about judging good decisions separate of their outcomes is of deep importance. A better process for decision-making on these lines, a’la the consistency of a good mental model or algorithm, is what makes some of our best index funds, poker players, football coaches, business tycoons, and nonprofits. “Trust the process” is a common refrain these days built from the heralded days of Moneyball and manifesting in the Philadelphia 76ers.
And let’s not forget, bad decisions are always bad decisions and most of them do in fact lead to bad outcomes. One such example was in 2000 when the CEO of an unusual mail-order service called Netflix offered his company to Blockbuster for a mere $50 million dollars. According to the oral history, Blockbuster’s executives laughed at the Netflix CEO, Reed Hastings, and sent him on his way. Without any real analysis or process for considering the offer. They just sized Hastings up, went with their gut instinct, played to their biases (many of which Kahneman highlights in our book), made a choice that started the unraveling of their company.
People make good decisions in different ways. But bad decisions always appear to be made the same. With heavy bias, emotion, and a lot of System 1 over System 2 thinking. Our author will help us understand this further with the rest of this week’s review.
