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More information does not always translate into better decisions

Category:
Leadership & Governance

Date:
24 December 2018

Managers like to think of themselves as rapid decision-makers – not unlike Formula One drivers who need to decide in a split second whether to pass someone on the inside or outside. But business decisions can be made both too fast and too slowly. That’s why a growing number of managers are opting for a strategy of ‘fail fast, fail early’: don’t overthink it, but test the viability of your idea on a small scale first.

Many people believe leadership is all about showing resolve. This typically translates into making lots of decisions, preferably at a high speed. It also explains why Rolf Dobelli, the author of several bestsellers on human decision-making, writes that ‘the idea of the high-powered, adrenaline-fuelled executive is glamorised in the corporate world’.

Yet Dobelli feels the image many leaders have of themselves as firm decision-makers (favouring language peppered with sports terminology) is a case of distorted perception. As he sees it, leaders are not footballers who decide almost intuitively whether to go for a long ball or a short pass. Dobelli: ‘The main thing when making decisions is to avoid rushing into anything, while also not going to the other extreme and waiting too long to decide.’

After all, as paradoxical as it might sound, behavioural psychology has taught us that there are other factors in the decision-making process that tend to win out over our tendency to jump the gun. One of these factors is risk aversion. According to Dobelli this tends to be particularly prevalent in large organisations, and it results in decisions being put off for a long. Dobelli: ‘Mulling something over is safer, cheaper and more comfortable than making a decision, acting on it and having to face the consequences.’

The trick to decision-making is being astute enough to recognise what Dobelli calls ‘the point of maximum pondering’, by which he means the point when postponing a decision any longer is not going to produce any new insights. ‘Many leaders are inclined to think they need to keep collecting more information to have a more solid basis for their decision, but the problem is that you never really know if you have enough information,’ says Thorsten Pachur, a researcher at the Max Planck Institute for Human Development’s Centre for Adaptive Rationality in Berlin. ‘The problem is you never know whether you have enough information. Scientists call this the “exploration-exploitation dilemma”: you will never know what the outcome of a decision would have been if you had waited longer to make it. In that sense, any decision you make is a leap into the unknown.’

The right strategy

Pachur says that a frequently cited study on different decision-making strategies in the corporate sector concludes that the more dynamic the sector, the more successful rapid decision-making strategies are likely to be. ‘In the data-driven digital sector, intuition is more critical to the success of a business than in energy conglomerates, where market changes are slow and decisions have long-term effects that cannot be readily reversed,’ he says. ‘The tech sector has developed an appropriate strategy known as “fail fast, fail early”. Don’t overthink it, just do it. If it works, smooth out the rough edges and then start preparing for mass production. If it doesn’t work: fine, let’s move on to the next idea.’

Jens Noll, a researcher at Zurich-based consultancy Fehr Advice, also views this approach as the only elegant way out of the ‘exploration-exploitation dilemma’. ‘Instead of collecting more and more information, you’re better off launching small-scale pilot projects first. These experiments yield exactly the kind of information that allows you to make crucial corporate decisions with less risk,’ Noll says.

He cites Google as an example of a company that, ever since its establishment, has tested even the slightest changes to the website on users first. But we’re now at a stage where even strategic decisions are increasingly made using pilot projects. Before Amazon decided to plunge into the risky business of fresh food deliveries, it tested the service on a small scale at its Seattle headquarters. Before launching a ride-sharing service with small buses on a wider scale, the Daimler subsidiary moovel first tested the idea with a few thousand selected customers in Stuttgart, Karlsruhe and Berlin. The experiments produced a wealth of data that served as valuable input for further developing the service.

Increasing the speed of innovation

Scientists and consultants agree that early, systematic and frequent experiments involving prototypes and customers boost the speed of innovation and cut the risk of developing new products and services for which there is no demand. But Dobelli feels there is another advantage: small-scale experiments can meet managers’ need for action, rapid feedback and reward. ‘So you’ve still got the glamour of the bold, fast-paced executive, but without the risk of making foolish decisions out of sheer impatience. In the most favourable scenario, systematic and smart pilot projects increase both the speed of decisions and their quality.’

Finally: Dobelli, Paruch and Noll each, independently of each other, emphasise that rushing into decisions can only be avoided if your company is not engaged in a constant battle for survival. In other words, not all businesses can afford the luxury of ‘fail fast, fail early’. Noll: ‘Large high-tech companies can launch several high-risk pilot projects in the hope that one of them will lead to success. But they will also survive if this is not the case. In smaller businesses, it’s more down to having managers who can make the right decisions at the right time.’

Also read: ‘A true leader is concerned with only one question: why?’