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.
'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.
