Best Practices for Effective Decision-Making (and My 6 Steps for Making Better Decisions)

Business managers/executives are hired for the primary reason to make good decisions.  But making good and smart decisions is very complex. Additionally, many business decisions can affect a lot of important things in the organization including people (and their families).  Good decision-making requires more than just critical thinking skills (analyzing facts and information to form a judgment) – it requires using an effective process combined and the right frameworks/tools.

Also, decision-making is based much more on emotion than logic.  This may sound counter-intuitive. But there is research from Dr. Antonio Damasio, a leading neurologist, who proved scientifically that making decisions is more emotional than logical (“Descartes’ Error: Emotion, Reason, and the Human Brain”, 2005).

There are many books on effective decision-making and there is also a blog that I’m a fan of and that I’ve been reading for years is called “Farnam Street” (named after the street where Berkshire Hathaway has its HQ in Omaha, NE) and written by Shane Parrish who studies decision-making and recently wrote a book on this topic called “The Great Mental Models: General Thinking Concepts“.

Shane Parrish aptly describes decision making as follows – “making better decisions isn’t one skill but rather a series of tools and frameworks. What distinguishes consistently good decision makers from poor ones is a series of diverse mental frameworks and tools (as well as relevant specific information).”

FS.blog says that “a mind as a pattern-matching machine” and discusses that we all think “in mental models which are mental chunks of knowledge that represent a concept” – it only says that “mental models shape how you think and how you approach problems”.  Furthermore, FS.blog says that most decisions are not critical but some are and “yet most of us don’t have the right tools to think through these problems…as a result, we often fall back to the pro-con list, where you list all the positive things that happen on one side and the negative things on the other trading them off… but the pro-con list comes with a lot of blind spots”.

Also, unfortunately even some of the most successful and very smart leaders make bad decisions that are rife with cognitive biases and are just simply mis-informed because (in many cases) an effective process was not followed in the first place. This is true and in an organization it’s important to make effective decisions. When making business decisions, I striveto look for ways to improve my decision-making so I wanted to share some of my favorite articles with links below which will help others (mostly GTM/Commercial/Sales & Marketing executives in tech/SaaS) in sharpening your decision-making skills. These articles and links below will offer you new models, frameworks and “systems-thinking” tools and insightful ideas to help us all improve our business decision-making.

Also, over the past many years, to be more cognizant of my own decision-making I’ve created my own approach to making decisions which has these 6 steps:

1. Prioritize which decisions to focus on
2. Collect available facts / information (i.e. data and from people)
3. Use a good process and frameworks/tools
4. Proactively avoid bad decisions (i.e. use Inversion,  isolate/deconstruct, look out for ignored facts, and avoid cognitive biases)
5. Consider the effect of misaligned incentives that may have an effect
6. Apply “Second-order Thinking” (ask “And then what?” and consider what and who this decision will affect and then how)

 

Here is a set of articles on decision-making – most of these are from FS.blog where Shane Parrish writes about better decision-making and various mental models:

Best Practices & Articles on Decision-Making

• Introduction to Decision Making
  • The Anatomy of a Decision: An Introduction to Decision Making
    • From Judgment in Management Decision Making by Max Bazerman using “System 2 Thinking“: “1. Define the problem, 2. identify the criteria, 3. weight the criteria, 4. generate alternatives, 5. rate each alternative on each criterion, 6. compute the optimal decision”
    • Hammond, Keeney, and Raiffa suggest 8 steps in their book Smart Choices:  “1. Work on the right problem, 2. Identify all criteria, 3. Create imaginative alternatives, 4. Understand the consequences, 5. Grapple with your tradeoffs, 6. Clarify your uncertainties, 7. Think hard about your risk tolerance, 8. Consider linked decisions.”
  • Decision Making: A Guide to Smarter Decisions and Reducing Errors
  • Circle of Competence – stay in your circle of competence – and know “what I know and what I don’t know”
    • Understanding your Circle of Competence: How Warren Buffett Avoids Problems
    • The Science of Hitting & the Strike Zone
  • Second-Order Thinking: What Smart People Use to Outperform
    • “Failing to consider second- and third-order consequences is the cause of a lot of painfully bad decisions, and it is especially deadly when the first inferior option confirms your own biases. Never seize on the first available option, no matter how good it seems, before you’ve asked questions and explored.” – Ray Dalio
  • Also, here is a summary of key takeaways from the podcast called “Making Sense with Sam Harris” who interviewed  Shane Parrish recently:
    • Look at the problem from 3 perspectives:
      1. What does this problem look like for me?
      2. What does it look like to other people?
      3. What does it look like through different lenses?
    • Reduce bad outcomes by considering varieties of situations and circumstances:
      1. What is the extent of possible outcomes?
      2. Where am I likely to end up on a probabilistic basis?
      3. Are there outcomes I want to avoid?
• Prioritizing your decisions
  • Urgent vs. Important: The Eisenhower Matrix: Master Productivity and Eliminate Noise
  • Reversible vs. Consequential: The Decision Matrix: Prioritize What Matters
  • Knowing when to avoid decisions: Do Something Syndrome
  • When intervening into a decision leads to a worse outcome: Iatrogenics: Why Intervention Often Leads to Worse Outcomes
• Making decisions with missing information
  • Decisions Under Uncertainty
  • The Value of Probabilistic Thinking
  • Process vs. Analysis: the process to make decisions is more important than the analysis
    • What Matters More in Decisions: Analysis or Process?
  • Three Filters Needed to Think Through Problems – Garrett Hardin, “Filters Against Folly“
• Avoiding Bad Decision
  • Deconstruct & Isolate
    • break problems into smaller pieces
  • Inversion: Inverting the Problem – Inversion and The Power of Avoiding Stupidity
  • Avoid Bad Decisions – Avoiding Stupidity is Easier than Seeking Brilliance
  • How Not to Be Stupid
    • “Stupidity is overlooking or dismissing conspicuously crucial information” – Adam Robinson (link)
    • “We know what to do, we just don’t do it correctly” / “The Checklist Manfisto” author Atul Gawande (link)
  • A 2-step process for making effective decisions – The Munger Two Step
    • 1. Understand the forces at play
    • 2. Understand how your subconscious might be leading you astray
  • The “map” (i.e. any theory, model, description, abstraction) is imperfect and it is not the reality – The Map is Not the Territory
    • it’s important to understand that the “maps” for decision-making are reductions, simplifications, or a snapshot in time
  • Don’t be “a man with a hammer who thinks that every problem is a nail”
  • Two Types of Ignorance
    • Primary Ignorance
    • Recognized Ignorance
  • Avoiding Ignorance – always be on the lookout for ignorance
  • The 4 Villains of Decision Making
  • Over-generalizing & The Sample Size Bias
  • Avoiding the Confirmation Bias which clouds our judgment (and identifying the disconfirming evidence)
    • “The confirmation bias is so fundamental to your development and your reality that you might not even realize it is happening. We look for evidence that supports our beliefs and opinions about the world but excludes those that run contrary to our own… In an attempt to simplify the world and make it conform to our expectations, we have been blessed with the gift of cognitive biases.” – Sia Mohajer “The Little Book of Stupidity:  How We Lie to Ourselves and Don’t Believe Others“
    • “The human understanding – when it has once adopted an opinion – draws on all things to support and agree with it. And though there be a greater number and weight of instances to be found on the other side, yet these it either neglects and despises, or else by some distinction sets aside and rejects.” – Francis Bacon
    • “One of the biggest problems with the world today is that we have large groups of people who will accept whatever they hear on the grapevine, just because it suits their worldview—not because it is actually true or because they have evidence to support it. The striking thing is that it would not take much effort to establish validity in most of these cases… but people prefer reassurance to research.” – Neil deGrasse Tyson
    • “When it comes to testing a theory we don’t instinctively try to find evidence that we’re wrong. It’s much easier and more mentally satisfying to find information that proves our intuition. This is known as the confirmation bias.” – FS.blog
    • Note: confirmation bias is a BIG and very frequent recurring problem in organizations but it is also one that should be one of the easiest for any individual to recognize and make an effort to avoid (but it requires “no ego” which is yet another problem).  May managers at work ignore contradicting evidence – we see this a lot.
  • Commitment and Consistency Bias
  • The Fundamental Attribution Error / FAE Bias
  • All Cognitive Biases – Mitigating and Avoiding Cognitive Biases
    • There are other biases beyond Confirmation Bias and here are some good insights on avoiding these
      • Avoiding Psychological Bias from MindTools
      • Reducing Biases in Decision Making – USC Marshall School of Business
      • Cognitive Bias Mitigation – Wikipedia article
  • “Illusion of predictability” – Nassim Taleb
  • Billy Beane on Making Better Decisions, Challenging Entrenched Thinking, and Avoiding Biases
  • How to Destroy Incorrect Ideas
    • “Part of the reason I’ve been a little more successful than most people is I’m good at destroying my own best-loved ideas.” – Charlie Munger in WSJ, 2019  / “The ability to destroy your ideas rapidly instead of slowly when the occasion is right is one of the most valuable things. You have to work hard on it. Ask yourself what are the arguments on the other side. It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.” – Charlie Munger, “Poor Charlie’s Almanack”
  • On Opinions – The Work Required to Have an Opinion
  • The Availability Heuristic
  • Don’t be The Fragilista
    • “The fragilista defaults to thinking that what he doesn’t see is not there, or what he does not understand does not exist.” – Nassim Taleb, “Antifragile: Things That Gain from Disorder“
• Making Decisions In Context of Understanding Human Nature
  • The Psychology of Human Misjudgment – Charlie Munger
    • Many more Insights from Charlie Munger
  • The Power of Incentives: Inside the Hidden Forces That Shape Behavior
  • The Distorting Power of Incentives
    • “the behavior you see is usually the result of incentives you don’t see” & “we generally get the behavior we reward” – Pebbles of Perception: How a Few Good Choices Make All The Difference, Laurence Endersen
  • Incentives Gone Wrong
  • Getting Human Nature Right
• Organizations require stability but everything naturally moves to disorder over time – there are 2 ways to create stability: active and passive
  • Battling Entropy: Making Order of Chaos

 

Also, here is a full list of 109 Mental Models from Farnam Street Blog:

• Mental Models: The Best Way to Make Intelligent Decisions (109 Models Explained)