Monday, July 18, 2011

Why Does Evaluating Decisions Require Moccasins?

There are a lot of books about leadership and making business decisions. I have some of them, since once I buy a book I never part with it, even if I am not particularly fond of it. My library is bigger than average as a result, much to my wife’s chagrin. She’d like to use some of that shelf space for something else. Maybe someday I will let go.
Often books that purport to carry wisdom about great-decision making derive this knowledge by evaluating a sample of successful decisions and then identifying what they had in common. I am not sure this is a valid method. If you want to question a lot of business conclusions out there I would recommend “The Halo Effect” by Phil Rosenzweig. My wife was happy I read this book because I got it from the library and therefore had to give it back.
The halo effect stems from a two-fold process: 1) much of the business studies that are done use interview and survey methodologies and 2) performance is the primary driver of how people respond to and interpret information. Therefore, since companies had good performance, they are attributed by people with good business qualities, like “strategically focused”, “operational discipline”, “strong collaborative culture” and the like.
Let me repeat – performance is the primary driver of how people respond to and interpret information. If we have outstanding performance, people respond by attributing positive adjectives, characteristics and traits to us – we are strategically focused, customer-centric, and exhibit principled leadership, etc. If our performance is lousy, the opposite occurs – we are floundering, inwardly-focused, and have a poor governance structure.
Further adding to the problem is that we get to judge decisions already knowing the outcome. If the outcome is good, then we conclude someone made the right call.
For an Analytic (read “lots of math and equations”) Finance major from the University of Chicago (read “a place that really gets into math”), there is nothing more fun at work than to run a few hundred thousand Monte-Carlo simulations in order to assess your risk exposure to commodity or foreign exchange rates, pension investment performance, asset investment performance, growth outcomes, potential budget variability, operational strategy, corporate strategy, or hundreds of other potentialities. After you do this for awhile, you realize that there is pretty much uncertainty everywhere and certainty nowhere (even though the proverbial death and taxes are certain, the timing is not!).
With this fine tuned sense of risk and uncertainty, an appreciation of the uncertainty of the decision-making environment is obtained. Just this morning, Border’s Books is on the verge of being ordered by the bankruptcy court to liquidate, and they are scrambling to find a buyer. So, looking at the outcome, and thereby attributing qualities, some guru can come along and begin touting Barnes & Noble’s superior strategic decision to expand their scope through things like the Nook reader and their online capabilities as being future looking, bold and courageous,  while Border’s kept their head in sand and committed to the antiquated bricks and mortar book retailing.
With hindsight, this seems like a no-brainer, but when these companies were actually making these decisions, up to a decade ago, it was a lot less clear where things were headed. Look at other industries – what happened to Webvan compared to Safeway or Krogers? Bricks and mortar retailing survived in that industry while the web approach did not pan out. So can we say that there was no probability that would happen in books as well? If that happened, then Border’s would have had the great strategy developed by prescient leaders and been in the researcher’s sample.
Business decisions are too complex to be able to use outcome alone to assess a bright line “correct” or “incorrect” assessment, or “good” or “bad” qualities. It just ain’t that easy. And outcomes can be deceiving.
How about “We studied football teams over the last decade to evaluate the decision-making process of the players making the coin-toss call. We have found several traits associated with the most successful of these coin-toss callers – they were leaders on their team (isn’t that why they were one of the three to go out to midfield at the start of the game?), yet they were humble about it - all the successful coin-flip callers dressed just like their teammates.”
Nassim Taleb in his book “Fooled By Randomness” (another library book - my continuing part in keeping family life harmonious) talks about problems with judging decisions based on actual outcomes; we have to have an ability to conceive of the world that has not happened as well as the one that has. His dramatic example (paraphrased and no guarantee that I haven’t butchered it): A game of Russian roulette pays the player $1 million if they play the game and are able to walk away afterward. Someone plays this game and receives $1 million. If we are evaluating outcomes, we would call this a great decision! However, I would wager not many among us would ever make the same decision as that person, because we appreciate the uncertainty and the risk that is inherent in the decision. Based on outcome evaluation alone this would have been a bad decision, though most of us would be ok with it.
Sometimes, great decisions were made even though a poor outcome resulted. Not many people study those.
Since outcome alone does not tell the story, and each decision has its own peculiar mix of probabilities , uncertainties, and magnitudes of danger, I think an adaptation of a phrase learned in childhood can sum it up: “Don’t judge a decision or its maker before you have walked a mile in their moccasins”.
I would love to hear your thoughts about this view of decision making or your stories on this topic if you have them.

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