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The Perfect Decision

An interview with Howard Raiffa, John S. Hammond, and Ralph L. Keeney, authors of "Smart Choices: A Practical Guide to Making Better Decisions." They explain how to minimize poor decisions.
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'Ready, fire, aim' is the celebrated motto of entrepreneurial decision making. But it can be a recipe for disaster. Is it possible to create a system to ensure better decisions?

What businessperson hasn't been faced with tough choices? Heck, you have to make tough choices almost daily. Whom should you hire--and fire? What's the best way to spend your own time? How much debt can you carry? Is a difficult customer worth the hassle in the long run? When should you think about selling out? Entrepreneurial legend has reinforced a kind of macho decision-making skill--real entrepreneurs make seat-of-the-pants decisions. Real entrepreneurs take risks with their choices. But is that legend actually creating a negative pathology? That is, if you can't make quick decisions with minimal information, you can't cut it as an entrepreneur in today's fast-paced environment? Is it actually setting up entrepreneurs to make bad choices? Inc. deputy editor Karen Dillon sat down with the authors of Smart Choices: A Practical Guide to Making Better Decisions--Harvard Business School professor emeritus Howard Raiffa, former Harvard Business School professor John S. Hammond, and Ralph L. Keeney, a professor at University of Southern California's Marshall School of Business--to find out why it's so easy to make bad choices and whether it's possible to create a system that minimizes the chances of that happening.

Inc. : What does the average person do wrong in making difficult decisions?

Keeney: One of the most common errors is that they start to solve the wrong problem. They jump at the first characterization of their decision, so their objectives are too narrow, and they consider too few alternatives. They're in a rush to decide and get it over with, rather than backing away from it, seeing it in a broader context, and really focusing on what they should.

Inc. : Why do you think people are so inherently ill equipped to make good decisions?

Keeney: I think we start making decisions when we're two years old, and we continue from there. Since obviously we haven't had any training, we get into a lot of habits. We accept the way problems are given: do you want your red pajamas or your green pajamas? So people are choosing from decisions given to them by others, and after 25 or 30 years of that, we're pretty much in that habit, rather than asking ourselves what decisions we should be addressing.

Raiffa: I think it's not easy to think hard about making decisions. The easy way out is just to do what comes naturally and not try to question the issues more broadly, and to balance pros and cons. Usually there are lots of conflicting objectives--for example, what is right to make a lot of money may not be right for your family.

Inc. : Take us through that proper decision-making process.

Hammond: Essentially, the process we advocate has eight possible steps in it. (See "A Systematic Approach to Decision Making," below.) You may or may not need every step, depending on your particular situation. But the first thing you need to do is define the "decision problem" that you're facing--what it is that you have to decide. A good solution to a well-posed problem is usually far superior to an outstanding solution to a poorly posed problem.

Inc. : How do we know if we're posing the problem correctly?

Hammond: That's a decision in its own right. You keep coming at it and coming at it and asking yourself, Is this really what I need to decide? You ask that at the outset, and as you go along you keep asking yourself, Am I working on the right problem? Often while you're in the course of deciding, the situation changes and the problem becomes a new problem. And sometimes the situation hasn't changed, but your insights into the situation have changed. There's no magical way to know that you have the right problem.

Raiffa: A good example is a man named Bill, whom we counseled. Bill, who with a partner was in the soundproofing business, was a little disgruntled with his lifestyle and thought that he'd like to sell out his part of the business. He posed the problem to himself as, How much should I accept for my share of the business?

Hammond: He said he wanted to talk to us about how he could sell out his half of the business to his partner. Basically, he hadn't formulated his problem very carefully. He thought his problem was getting the right price for his business. He hadn't developed a full range of creative alternatives--the one alternative he was pursuing was selling out to his partner. If selling was his problem, he could have sold out to somebody else. Or they both could have sold out to somebody else and his partner could have stayed on and managed the business if he wanted to. But because he hadn't formulated his problem very well, he missed a whole range of other alternatives, including the one he ended up choosing, which was to stay in the business and do something entirely different.

He hadn't considered the consequences very carefully, either. For example, it would have been unbelievably demanding to start a new business at age 57, which was what he thought he wanted to do. Furthermore, he hadn't thought about capital-gains taxes. So because he hadn't really considered the consequences, he wasn't in a position to make the appropriate trade-offs. Once we had talked him through his decision a little bit, he went off and thought about the problem on his own. And lo and behold, he ended up not selling out to his partner but instead staying with the business, opening a West Coast branch, being very, very successful, and selling out a number of years later at a handsome premium.

Inc. : How do you help people see the real questions they should be asking themselves? Surely, Bill thought that "What is the right price at which to sell out?" was the appropriate question.

Raiffa: I think helping people find the right question involves probing their objectives, goals, interests, fears, aspirations; helping them psychoanalyze themselves, ask themselves what they really want; and understanding their basic desires and continually probing, probing, probing.

Hammond: In a nutshell, ask yourself, Why am I considering this decision?

Raiffa: It's important also to click into a new gear by brainstorming and devising alternatives: let's not try to be entirely practical at first, but let's just try to imagine as many options as we can, keeping in mind our objectives.

Keeney: People don't consider whether they're working on the right problem. An action-oriented man like Bill tends to focus on a solution. He thought, "I don't want to disrupt my partner, so maybe I can sell out to him." But he didn't carefully decide whether that was the right problem--it just kind of popped up.

Inc. : Do you think an entrepreneur inherently has a way of approaching decisions that's different from that of the average person?

Hammond: What distinguishes entrepreneurs is the way they choose to define the problem. They aren't limited by a lack of resources; they find a way to acquire them. Whereas somebody in a large corporation would say, "These are the resources I have, now what can I do with them?" the entrepreneur would pose the problem differently and say, "This is what I want to get done, now how can I find the resources to do it?"

Inc. : I think entrepreneurs would naturally think big.

Raiffa: They do think big, and to think big is to lay out a large menu of alternatives. Some of these may be workable, some of these may be impractical; but you have to think that way. Release yourself from constraints, think imaginatively, get others to help you devise and brainstorm, but always keep in mind your objectives, and be honest with yourself about what you really want. And what you really want may be broader than just making money.

Inc. : When you think so broadly, do you take yourself out of the reality of everyday life?

Raiffa: You should take yourself out of the reality of everyday life for a period of time. It would be wrong to always be a wishful thinker and not be practical. But you have to go back and forth, from being practical to being irresponsibly creative.

Inc. : It seems to me that our culture celebrates an entrepreneurial way of thinking, which often includes seat-of-the-pants decision making. Entrepreneurs often make quick decisions amidst uncertainty, perhaps without all the relevant information, based on a gut feeling. Do you think poor decision-making habits are being held up as a "model" because some people have been lucky enough to make good decisions with bad information?

Hammond: There are some good intuitive decision makers out there, and we should celebrate them. But the method that we outlined can become intuitive. You can, in just 5 or 10 minutes, go through a checklist asking, What's my "decision problem" (what am I trying to achieve here?), what are my alternatives, how can I think of others, and so on. In other words, quickly ask yourself a series of those simple questions. You can do it over time until it sort of becomes automatic. Eventually, it drives your intuition.

Keeney: Maybe an analogy is the case of world-class athletes. Racers know what to do in a race, but just before the race, they want to clear their minds and think about the various elements that are crucial.

Inc. : What role should emotion play in good decision making?

Raiffa: There's always a debate about where systematic analysis leads and where intuitive analysis leads. What happens if they clash? Should you go with your intuition, or should you go with the more formal analysis? My answer is that if intuition and analysis are in conflict, you should feel uncomfortable. You should review both sides of the ledger to see if your intuition holds up when it is informed with some systematic analysis. And if your analysis seems wrong intuitively, don't accept the analysis, just keep on probing.

Inc. : You said you should feel uncomfortable. What do you mean by that?

Raiffa: If you feel uncomfortable, you should say, "Maybe I'm not ready to act right now. Maybe I should do a little more thinking about the problem."

Inc. : Can you ever get to the point of feeling certain about decisions?

Raiffa: When I was younger and taught at Columbia, I had an offer at Harvard. I had a very difficult time deciding. Finally, somebody said, "Look, whatever you do, commit yourself partially but not fully. Tell your friends what you're going to do, but don't write any formal acceptance or rejection. Then see how you sleep for a week and let your emotions catch up with it. See how it settles down before you act." I think that's wise advice.

Inc. : So you're saying that at some point emotion has to kick in.

Raiffa: That is very important.

Keeney: The fundamental reason to make decisions is because you care about what consequences may occur. If you don't care, don't bother to make decisions.

Inc. : Some business owners would say that to make smart and practical decisions you must take your emotions off the table.

Keeney: We would say it's very practical to include your emotions.

Inc. : Do you think anything about today's culture works against systematic decision making? We celebrate company managers who make quick decisions and move on. They don't go back to their offices to mull over the problem; they take quick, decisive action.

Raiffa: One way of making a decision is to practice pre-decision-making, to think about some of the things ahead of time; then when a real decision comes up, you're prepared, you already have a mental process that you can run through fairly quickly. Not having a structure in mind ahead of time may delay decision making.

Hammond: For example, the marines have a reputation for dealing with problems quickly and decisively, but they really don't make impromptu decisions. They've got a bunch of routines they go through just like a fire drill. They have a reputation for being very macho and being able to decide on the spot, but their decisions really aren't spontaneous. They are trained to deal with certain classes of situations; in this kind of situation you do this, and in that kind of situation you do that. It's a careful contingency plan.

Inc. : Do you think you can delegate making smart choices? Can anybody else make decisions for you that will be effective?

Hammond: I would be comfortable delegating my decisions only to somebody who is quite familiar with our method, who knows my objectives, and who knows how I feel about certain things. I would be very happy to have someone who understood that make a decision for me.

Inc. : Probably the most frustrating thing for a small-business owner, an entrepreneur, is that so many decisions are made amidst uncertainty. How can an entrepreneur cope with that uncertainty and still make good decisions?

Raiffa: I think there is a trap here: we're not saying that people should put down probabilities and do quantitative analysis. We encourage people to reflect on the uncertainties, on what might be the possible outcomes; and to trace out the consequences of those outcomes. Sometimes by grappling with uncertainties, by listing what could happen, by ordering the likelihood of the possibilities, you can clarify the problem. It's important to identify what the uncertainties are, what the possible outcomes are, what the consequences are to your lifestyle. Will you sleep well? Or will you have so much anxiety that it will interfere with your sleep or your lifestyle?

Inc. : Some people would say that some of the best and most interesting business ideas would never have come to be had their originators gone through that process.

Raiffa: Yes, but we make a big distinction. Uncertainty is present between the quality of the decision and the quality of the outcome. You may have a decision that was made by the seat of the pants and was not thought through clearly but that turned out miraculously well by luck. However, I think luck usually goes to the better decision maker.

John S. Hammond is a former professor at both Harvard Business School and MIT; Ralph L. Keeney is a professor at the Marshall School of Business at USC; and Howard Raiffa is the Frank Plumpton Ramsey Professor of Managerial Economics Emeritus at Harvard Business School. Their book, Smart Choices: A Practical Guide to Making Better Decisions, will be published by Harvard Business School Press in October.


10 Diagnostic questions

1. What's my decision problem? What, broadly, do I have to decide? What specific decisions do I have to make as a part of the broad decision?

2. What are my fundamental objectives? Have I asked "Why?" enough times to get to my bedrock wants and needs?

3. What are my alternatives? Can I think of more good ones?

4. What are the consequences of each alternative in terms of the achievement of each of my objectives? Can any alternatives be safely eliminated?

5. What are the trade-offs among my more important objectives? Where do conflicting objectives concern me the most?

6. Do any uncertainties pose serious

problems? If so, which ones? How do they impact consequences?

7. How much risk am I willing to take? How good and how bad are the possible consequences? What are ways of reducing my risk?

8. Have I thought ahead, planning out into the future? Can I reduce my uncertainties by gathering information? What are the potential gains and costs in time, money, and effort?

9. Is the decision obvious or pretty clear at this point? What reservations do I have about deciding now? In what ways could the decision be improved by a modest amount of added time and effort?

10. What should I be working on? If the decision isn't obvious, what do the critical issues appear to be? What facts and opinions would make my job easier?

--Reprinted by permission of Harvard Business School Press. Excerpted from Smart Choices: A Practical Guide to Making Better Decisions. Copyright 1998 by John S. Hammond, Ralph L. Keeney, and Howard Raiffa. All rights reserved.


A Systematic Approach to Decision Making

1. Address the right decision problem.

2. Clarify your real objectives.

3. Develop a range of creative alternatives.

4. Understand the consequences of your decision.

5. Make appropriate trade-offs among conflicting objectives.

6. Deal sensibly with uncertainties.

7. Take account of your risk-taking attitude.

8. Plan ahead for decisions.

--Reprinted by permission of Harvard Business School Press. Excerpted from Smart Choices: A Practical Guide to Making Better Decisions. Copyright 1998 by John S. Hammond, Ralph L. Keeney, and Howard Raiffa. All rights reserved.

Last updated: Oct 1, 1998




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