Making Great Decisions
Read this article, and think about the questions that you typically ask yourself when making decisions.
When you make a decision, do you believe that there is always just one route to your desired outcome? Using this reading as a guide, prepare a productivity table for some of the tasks that are currently on your to-do list. Are the items that come up as priorities the same items that you truly believe to be priorities?
On September 24, 2007, David R. Henderson and Charles L. Hooper made a presentation at the Google Tech Talks Series. Mr. Henderson and Mr. Hooper are the co-authors of the book Making Great Decisions in Business and Life. Mr. Henderson is a consultant and economist. Mr. Hooper is president and co-founder of the business consulting firm Objective Insights, Inc.
Mr. Henderson opens up the talk by referring to the common phrase “work smarter, not harder.” He points out that this is really not helpful for people. He says that you cannot just tell this to people but that you must give people a means of achieving their goals. Providing a plan to help employees through the process will enable success. We have to help people achieve their objectives and make better decisions. Mr. Henderson believes that as we navigate through the complexities of life, we may find that many things are actually easier than they first appear.
In this article, we will review all of the decision-making concepts and practices that Mr. Henderson and Mr. Hooper present in their talk.
Asking the Right Questions
Mr. Hooper uses the example of a wedding couple to illustrate how asking the right questions can lead us to better decision-making. In this example, the couple’s photographer wants to take pictures of the last parts of the wedding: the bouquet toss, the garter toss, and the cake cutting. The couple tells the photographer that they will not be there for the last part of the wedding, because a limousine is coming to take them away. The limo company charges the couple $1.00 for each minute the driver has to wait for them if they are late, and they do not want to incur any additional expenses.
In this situation, the couple did not consider the fact that they had taken the time and effort as well as spent a great deal of money in planning their wedding. Leaving early so they would not have to pay the driver extra money was very short-sighted. If they were a full hour late, then they would only be paying an extra $60. If they considered this decision in a different way, discussed the issue with others, or asked different questions, they might have been able to come up with a better solution than leaving their own wedding early.
Mr. Henderson uses the very personal example of his father, who had been in the hospital as a result of an intentional overdose of sleeping pills. Mr. Henderson was determined to talk his father out of trying to commit suicide again. His goal was to find out what had happened during the two weeks since he had last spoken with his father. It turned out that his father had severe and debilitating pain in his legs, possibly a side effect from suffering polio during World War II. His father was a very physically active man and could not imagine a life without the use of his legs. Mr. Henderson asked his father if he would want to continue living if there was some type of surgery that could fix the problem. The answer, of course, was “yes.” However, his father had never previously tried to find out if there was such a surgery that could alleviate his pain and restore the use of his legs. It turned out that such a surgery existed, and his father had the surgery several weeks later. Originally, his father had gotten stuck in his old ways of thinking and did not consider the sound reasoning and steps that might lead to a more positive outcome.
Nine Principles for Decision-Making
As people go through various situations, certain decision-making principles should become clear. They are:
- avoid the “I must” trap;
- think on the margin;
- create better alternatives;
- think about what matters;
- ask what changed;
- think value;
- think arbitrage;
- know what you want before you choose; and
- manage biases, which even affect the best of us.
We will discuss each of these principles in detail below.
- Avoid the I must trap. This is when people feel that they must do something, when in reality they probably have other choices. Mr. Henderson points out that the only thing people must do is die. Everything else we do is what we decide to do. He uses the example of the wedding couple discussed above. The couple felt that they must leave by a certain time, when that really was not the case. They simply decided that they must leave without looking at their other options.
- Think on the margin. Consider the extra cost of doing something other than what you had originally decided. Chances are the differences will be very little. Using the wedding couple example once again, the marginal cost of staying an additional hour at the couple’s own wedding was a mere $60. Put into the context of the entire cost of the wedding, the extra cost of staying the additional hour represented a very small percentage of the total spent.
- Create better alternatives. By looking for better options, you will create better choices for yourself. Most of the time, alternative solutions are not obvious to most people. Do not settle for the obvious answers. Mr. Henderson cites the situation where his father felt that his only choice in the face of his pain was to commit suicide. His father had not considered that surgery might be a viable option.
- Think about what matters. Keep the big picture in mind. Consider the really important factors and evaluate the situation from a future perspective. Ask yourself if what you are doing will matter 5 years from now, 10 years from now, or more. For example, in 50 years, will the wedding couple look back at the $60 they saved by leaving their wedding early and say that they had made the right decision?
- Ask what changed. It is important to clarify any changes that might have occurred, as clear thinking is important in analyzing a situation. Be sure to ask the right questions about what might be different. For example, Mr. Hooper asks his audience to determine what is wrong with the following assumption. He says, “Fewer people are attending major league baseball games this year, because baseball is boring.” In reality, the game of baseball has not changed. If someone thinks the game is boring, then he or she will continue to believe that it is boring. People who like baseball will continue to like the sport. Perhaps fewer people are attending, because of other reasons (e.g., the players have changed, prices have increased, or contract disputes have impacted attendance).
- Think value. Consider the value you get from your decisions. One decision might be evident, but the cost of another choice might be more cost effective. Also, if time is a factor, it should be considered part of the value. Mr. Henderson uses his experience with an uncomfortable pillow at a hotel to illustrate this point. He says that because the pillows at the hotel were uncomfortable, he considered changing hotels. The cost of doing that was several hundred dollars. Once he realized that the problem was not with the hotel but with the pillow, he was able to assess the value of other decisions. He decided to go to a store and purchase new pillows for a fraction of the cost of changing hotels.
- Think arbitrage. Can you move your resources from a lower value use to a higher value use? Do not just look at the whole; explore the value of the individual parts. Mr. Henderson tells the story of a friend of his who had a sail boat in the summer of 1948. The friend’s father was in the mining industry, which was discussed at home all of the time. While sailing, the young man realized that the keel of the boat was made of lead and that the value of the material was worth more than the boat, so he sold the lead keel and replaced it with lower-cost iron. Then, he sold the boat. He kept doing this repeatedly; selling lead keels, replacing them with iron, and then selling the boats. During that summer, the young man made $20,000. This would translate into $300,000 in today’s dollars.
- Know what you want before you choose. Determine the hoped for outcome. It is important to distinguish between good decisions that might result in bad outcomes and bad decisions that might get good results anyway. Mr. Hooper uses the example of Nordstrom’s customer service philosophy and the company’s liberal return policy. The store’s goal is to make the customer happy at all times, even if the customer is not always right. He relates a story that has taken on legendary proportions of a customer who attempts to return car tires to Nordstrom, which is a high end department store that does not sell any automotive parts or services. The sales person takes the tires back and gives the customer a store credit. While this may seem like a poor decision on the part of the store, the long term benefits are that the store has a happy customer.Note that there are many variations to this legend, but it does have some basis in fact. The store in question was in Fairbanks, Alaska and had seemingly been built on the site of a former tire shop. Some retellings of this story include verification by John Nordstrom, but this has not been confirmed.
- Understand that biases affect the best of us. Once we recognize that everyone has biases, we can make better decisions. Mr. Henderson shares a story of a female business associate who said that she would no longer shop in a particular electronics store because they would not wait on her. She said that, as a woman, she was ignored. Mr. Henderson said that he had the same experience at the store and that he also was not waited on. However, while the woman felt that she was ignored because of a perceived bias toward women, Mr. Henderson felt that the store simply had fewer salespeople in an effort to save money.Understanding bias can also cause us to create other alternatives. Another story Mr. Henderson shares is of a young black man who took his business plan to a bank to ask for a loan. This took place during a time in our history when people were not able to easily obtain loans because of the color of their skin. The young man was disappointed but wanted assurance that his plan was a good one. The bank assured him that his plan was a good one, but that they still could not loan him the money. Undeterred, the young man asked for the recommendation of another bank and a letter stating that the plan was a solid one. The young man understood the bias, but he found ways to get around it to solve his problem. This man was John H. Johnson, who went on to become the editor of Negro Digest, Ebony, and Jet magazines.
Other Decision-Making Factors to Consider
Is the customer always right?
Mr. Hooper points out that the customer is not always right. Businesses should not seek to meet what the customer wants, but to meet what you believe to be realistic expectations of that customer. He mentions that Best Buy recognizes that the customer is not always right by telling us that Best Buy divided its customers into two groups: angels and devils. The company defined the angels as easy customers and the devils as difficult customers, dealing with these customers according to their distinctions. The company did this in some of its stores but not all of them. Those stores who did this had higher sales levels than other store locations.
Mr. Hooper then brings up Pareto’s Law and Factor 16. Pareto’s Law says that 20% of the people create 80% of the income and that 80% of the people create 20% of the income. Factor 16, as introduced by Mr. Hooper, indicates that the people in the 20% group of income producers are 16 times more productive than those in the 80% group. Using this information helps companies focus their marketing and sales efforts on the customers who are most profitable rather than on those who fit into the unproductive groups.
Another way of evaluating decisions is to develop a productivity table to determine what actions to take. The list should include important actions, how long it will take to complete (value in hours), the penalty for inaction (dollar amount if task is not realized), and the rewards for completion (financial gain upon completion). Once the chart is completed, a weighted return will determine the value of each task and will help to prioritize next steps. The weighted return is calculated by adding the reward amount plus the penalty amount and dividing by the number of hours. This provides a dollar value per hour and will indicate items with a higher weighted value that should be completed first. However, life takes into account probabilities. For example, even if a task has not been completed, it is possible that penalties for not doing it might not ever occur (i.e., even if a porch step is not fixed, it is possible that no one may ever trip on it). Therefore, a weighted productivity table can help further prioritize individual tasks. This is done by assigning a level of probability to an event occurring based on your reasonable expectations of whether or not that event might occur. Multiply the penalty by the probability, add it to the reward multiplied by the penalty, and divide this by the number of hours. This will now give you a new value in terms of dollar value per hour. By including probabilities, the calculations will provide different values as compared to a table that is calculated without probabilities for each task. Then, the items with the highest values will be evident and should be completed first. Mr. Hooper also quotes Albert Einstein: “Make everything as simple as possible, but no simpler.” His point in bringing up this quote is that it is important to explore all solutions to a problem with an eye to resolving the problem in the easiest way available.
Mr. Hooper discusses the case of a BioTech company that had developed a drug for HIV treatment. The company initially believed that because it was a small organization, it would not be able to sufficiently bring its product to market. The company thought that a better solution would be to license its product to a larger, more established pharmaceutical company that would have a marketing machine and sales force already in place, enabling the smaller company to have greater sales success with the product.
In order to determine whether or not this was really the case, Mr. Hooper suggested that the smaller company evaluate how much money it would earn if it marketed the product themselves. If the company marketed the medicine independently, then it would get to retain all of the revenues realized. Then, he suggested that the smaller company look at how much money it would make from licensing fees if it gave the product to the larger organization for marketing.
Finally, the last piece of information to be gathered was to determine the threshold (that is, how much the large pharmaceutical company would have to sell in order for the licensing revenues to equal what the smaller company would make by selling the product on its own). It turned out that the larger company would have to sell five times the amount that the smaller company would have to sell in order to make the revenues equal. As a result of determining this sales threshold, the smaller company decided to market the product on its own and was extremely successful in the process.
In the decision-making process, companies should always be sure that they are doing the right thing. In addition to ensuring that all behaviors are legal and moral, another factor to be considered is how behaving ethically will impact the organization from a cost/benefit perspective. For example, if a company acts in an unethical manner, their business options will begin to shrink. The company’s reputation will suffer, and customers will be lost.
Mr. Henderson and Mr. Cooper believe that leaders should develop their own personal Constitutions. Similar to the way the US Constitution begins, “We the people…,” an individual Constitution should state, “I, the person….” An individual Constitution should include a list of things that a person will or won’t do in an effort to avoid negative situations.
- Mr. Henderson and Mr. Hooper are co-authors of the book, Making Great Decisions in Business and Life. Mr. Henderson is an economist and a consultant; Mr. Hooper is president of the consulting firm Objective Insights, Inc.
- Asking the right questions will lead to better decision-making.
- Nine principles for decision-making include: avoiding the “I must” trap; thinking on the margin; creating better alternatives; thinking about what matters; asking about changes; thinking about value; thinking about arbitrage; knowing what you want before you choose; and recognizing that biases affect the best of us.
- Recognize that the customer is not always right, and develop appropriate strategies for addressing customer relationships.
- Develop productivity tables to determine task priorities.
- Identify thresholds to determine what actions will be most profitable.
- Making ethical decisions will lead to greater business options and profitability.
Henderson, David, R. and Hooper, Charles, L. 2007. “Making Great Decisions.” Google Tech Talks Series