Good Decision?

By Brad Thomason, CPA

 

How do you know if a decision is a good one?  This question obviously has far reaching implications for business owners and investors.  But if you start to peel back the cover, it becomes equally obvious that it’s not quite as simple a question as it appears on the surface.

In the latest issue of Backpacker magazine there’s a brief piece about a group of hikers on a coastal island who were trying to decide whether or not to make camp at a sensible spot near a stream, or press on over broken terrain, in the dark, to make it out to an ocean-side promontory which was notorious for dangerous weather.  They decided to keep going.  No one broke a leg in a nasty fall, the bad weather never materialized, and they got a really cool view the next morning when the sun came up.  All of which was offered in support of the notion that they made a good choice by taking the risk.

But I wonder if they would have drawn the same conclusion if they’d had to sleep through a drenching gale; or worse, someone had slipped and initiated a plot thread which ended with a medevac.  I can imagine someone uttering the old standard, “Well, it seemed like a good idea at the time.”

People who study decision making are very familiar with the mechanics underlying this scenario.  As an offshoot of Philosophy’s “long debate” lies the question, “Do we determine the rightness of a decision based on its outcome, or the process by which it was reached?”

When giving talks on this topic, I always use the following example.  Suppose you wake up one morning, look outside and note that it is cloudy.  On the way out the door, you grab your umbrella.  You make it through the entire day without getting rained on.  Was it a bad decision to take your umbrella?

Most of us would agree that it wasn’t, just as we understand that the advice being touted in the Backpacker piece would have fallen on its head if the hike had gone differently.  For these reasons, it is generally accepted in decision/game theory circles that the rightness of a decision is based on the process, not the outcome.

If you have an 85% probability of winning in a game of chance, you should play (assuming equal positive and negative outcomes).  Even though an 85% chance makes it a statistical certainty that you will lose sometime.  A loss in the first round is not proof that you shouldn’t have played.  Because the sum of the results is what matters, and if the odds really are as advertised, you will have a net win every time.  Assuming you don’t quit before the math can catch up.  Recognition that you should participate is an action which occurs before the game itself; it’s an expression of process because it’s predicated on realizing which pathway has the best chance to succeed.  On the other hand, buying a lottery ticket that just happens to be a winner doesn’t make it a “good investment.”  You just got lucky.

In matters pertaining to finance it is expected that those considering x will exercise what is loosely referred to as “due diligence,” which is itself a nod to the notion that a responsible approach is to be used.  Process matters, not just results.

I could go on, but you get the point: any way you slice it, in a world where we can’t control everything (which is the key factor in all of this), the outcome alone can’t be the arbiter of whether or not we made a good decision.  Chance and the influence of others can impact the outcome, so just as it wouldn’t be legitimate to take credit for something you didn’t have the power to bring about, neither is it reasonable to blame someone (by judging their decision to be a bad one) when the desired result is not achieved.

This is a slippery slope to be sure, and acknowledging this aspect of reality can quickly turn into an excuse for dodging accountability for the things which we can control.  We can’t just cry “bad luck” every time something goes wrong.  Because there are times when things go wrong because of a bad decision.  But in the end, a discernment between the two is an important part of reading results as they actually are.

Good decision makers are those who are deliberative and careful; they realize that luck is nice when it goes your way, but in the end is really not a sustainable business model.  These understandings unavoidably cause them to gravitate toward process, and away from outcome, as the means of determining whether or not a decision was a good one.

Still, the urge to take the easy way out is strong.  It is very appealing to just look at whether or not something worked and let that be the answer.  Make it a point to pay attention to this for the next couple of days and you will see what I mean.  In fact, you may be surprised how often you make snap judgments about the quality of decisions made by those around you, and base those determinations solely on outcome.

But to be the best decision maker you can be, it’s important to understand that there is a difference, and that good process is ultimately the key to developing the greatest acuity.

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