Edition 53, Strategy

The Art of Making Bad Decisions and Getting Good Outcomes

By: Luis V. Montiel

During our lives we learn to consider most activities as common skills. It is unlikely that one day, without any reason, we start questioning activities such as getting dressed, making breakfast or driving.

However, among these seemingly trivial activities, there are some that have relevant consequences. Making decisions is one of them.

Before learning to walk, we experimented with decisions about our tastes, interests and risks. For example, a baby’s first steps are the result of the decision to overcome fear for the sake of curiosity. By the time we become teens, despite our poor judgment, we have accumulated more than 10 years of experience as decision-makers, and on the day we get our first job, making decisions is an act as natural as walking.

Despite of being a seemingly common activity, the corporate world reserves their best positions for those individuals who, given their decision-making abilities, produce the best outcomes, either higher earnings or some other reward. However, it is worthwhile to note the following: If companies value their employees by the outcomes of their decisions, is it possible to make bad decisions that generate good outcomes?

Although the answer may seem trivial, it is surprising the number of qualified entrepreneurs and directors who lack the resources to answer the question. In spite of its importance, the decision-making process is seen as an activity that just happens, as natural as breathing and rarely questioned. Furthermore, there is a false belief that the best managers have an innate intuition for making good decisions, without considering that deciding, unlike breathing, is an activity that can be perfected with a deep understanding based on analysis.

So I ask again, can bad decisions bring good outcomes? It is possible that the reader may begin to doubt whether his/her first answer was correct. Not to prolong the uncertainty, it is important to say that it is not only possible, but it is common to observe bad decisions that yield good outcomes in both public and private sectors. However, although the answer is a resounding yes, it is more important to understand why a decision is correct or not, and to do this, let us take a small game as an example. The game has only one rule: Each question must be answered clearly and in a direct manner, so that words like “it depends” are not allowed. The game begins with the following question: Is it a good decision or bad decision to buy a lottery ticket? As innocent as the question sounds, many will be tempted to say that it depends. However, the game is about thinking and taking a stand. If an employee buys a lottery ticket, would you say that she/he made a good decision or a bad decision? Record your answer and continue. After the day of the drawing, you find out that the ticket won the first prize. With this information, you answer the next question: Was it a bad decision or a good decision to buy the lottery ticket? It is a common reaction for people to change their minds about the decision in the second question. Finally, let us say there was a mistake and the ticket in reality did not win any prize. With this information, answer: Was it a bad decision or a good decision to buy a lottery ticket?

At this point, most readers will have changed their mind at least once about buying lottery tickets, even though the decision is the same, to buy or not to buy a lottery ticket. It should be noted that the context of the decision was never changed; I only provide information about the outcome. That is to say, if we define the quality of a decision based on the outcome, we would say that decisions that produce good outcomes are good decisions. So can a bad decision generate good outcome? If the reader is inclined to answer no, I would remind you that the correct answer is a resounding yes, although it certainly is not the most popular response among managers and academics in the business world.

This mistake is generated by everyday inertia. Since childhood we learn by impulse and response; and learn to relate decisions and outcomes as if they were the same. But this confusion is the cause of many of the biggest mistakes in the world of management. For example, if we evaluate our employees based on the outcome of a strategic decision made today, we will not be able to evaluate such decision until the outcome is revealed. The decision will be the worst and best decision at the time the decision is made, which leaves entrepreneurs and employees with two alternatives. The first one is to avoid bad outcomes at all costs, which means sacrificing risky projects that could bring real competitive advantages. The second one is to study clairvoyance.

A particular problem cause by the confusion between decisions and outcomes is the creation of a culture of fear. For example, Palm, Microsoft and BlackBerry strongly criticized the launch of the first iPhone in 2007, even though the technology necessary to create smartphones existed since 2002, this delay was caused by corporation’s fear of failure. Eight years later, Palm is now out of the market, Microsoft is trying to enter and BlackBerry has lost the leadership of the sector. A more recent example is that of Tesla Motors, which in 2012 shock the markets with an electric car. GM could have been the leader of the electric cars market if it had not cancelled the production of the EV1 in the 1990s. In Mexico, perhaps the most compelling example is Aurrera, which, when facing the risk of competition withdrew from the market giving way to Wal-Mart. The decisions of entrepreneurs like Steve Jobs and Elon Musk were good not because they generated good outcomes. Lisa was one of the greatest failures of Apple and SpaceX (the sister company of Tesla Motors) has failed to date to land a single reusable rocket. However, we can consider these decisions as good if we ask ourselves seriously what makes a decision good or bad.

Similarly, evaluating managers based on their outcomes — as if outcomes and decisions were the same — generates an unfair compensation scheme where incompetent-lucky individuals rise to management positions. This explains why so many employees complain about their bosses’ limited skills. We can illustrate this with a simple example: Assume a brokerage house with a thousand brokers with equal abilities. The company has decided to promote each year those whose portfolio shows no losses. Given the nature of the markets, it is expected that a random percentage (say 50%) of the brokers have a bad year. At the beginning of the second year 500 brokers will have been promoted, and at the beginning of the third year 250 will receive a second promotion. After 10 years, we would have two brokers as stars, even though they all have the same skills. Real life is even tougher, as unskilled workers take fewer risks in order to cling the corporate ladder and wait for a stroke of luck to move up. This scheme is frustrating for employees and it is inefficient for corporations in terms of their management team.

Now, if a bad decision can produce a good outcome, and a good decision can produce a bad outcome, how can we determine what makes a good or a bad decision? To answer this question we need to understand what is a decision and what are its components. In the remainder of this article, I will focus on difficult or important decisions, although trivial decisions such as deciding where to diner share the same elements but do not require rigorous analysis.

We define a decision as “An irrevocable allocation of resources.” A decision is reached when there is no turning back and our resources have been committed. In the business world, the most common resource is money, however depending on the problem; we can speak of other resources such as time, health, etc. Under this definition, decisions have three main components: alternatives, uncertainties and information. The lack of alternatives leaves us incapable to act, the lack of uncertainties is a utopia that leads to a trivial choice about preferences and the lack of information is a trivial gamble.

With these ideas, we can establish that a good decision is one that focuses on strengthening the weak points of its components. For example, readers may ask if during the last important decision at work, a formal procedure was followed to determine whether the alternatives considered were adequate or not. In practice, it is common to consider alternatives that do not resolve the main problem. However, the worst thing is to make a decision without devoting enough time to identify new alternatives. The most interesting alternatives are not easy to find and require intense work. Hence, a decision with bad alternatives will be a bad decision.

Of the three components (alternatives, uncertainties and information), the analysis of uncertainties is perhaps the most interesting and the most technical. In this case, a good decision is one that can identify and describe clearly what the relevant uncertainties are and discard those that have a trivial effect on the final outcome. A large scientific community works on various methods to improve the decision-making process using a wide variety of mathematical models such as: Estimation of empirical probabilities, approximations to joint distributions, optimization under uncertainty, preference analysis, assessment of risk attitudes, sensitivity analysis, among others; the models and tools developed in this area are the difference between making a bad decision and being lucky or making a good decision and generating the highest possible value for the organization. Clearly you do not have to be a mathematician to make good decisions, but to know and use tools that can help to understand the behavior of the uncertainties is essential in a decision of quality1.

Finally, a good decision is one that has enough information about the problem, the uncertainties, and the preferences of the decision maker. It is essential to understand that a decision made with the information at hand is most likely a decision of low quality. It is the responsibility of decision maker to seek the information that is required and not simply to use what is available. We must understand that to make a decision of quality it is required to leave behind phrases like “paralysis by analysis,” which serve as an excuse for making hasty decisions with insufficient and low-quality information. It is the decision itself and the facilitator that determines when there is enough information to allow us to make a good decision.

Although decision-making seems to be common activity, it can be quite complex and technical. For example, in companies like Chevron Corporation there are entire departments dedicated to implementing iterative procedures for making multimillion-dollar decisions. In U.S. hospitals it is common for facilitators to help patients and doctors make high-risk decisions. Even in sports, films like Moneyball give us proof of the power of the decision-making models in practice.

Decision-making is too broad a topic to be cover in such a small space. However, it is crucial that Mexican industrialists, businesspersons, entrepreneurs and academics participate in this discussion and start questioning traditional concepts. Many of the major economic and social problems of Mexico were generated by decisions made with little information, few alternatives and without thinking about the possible effects of the uncertainties. If we want to solve the current problems to improve our quality of life, we need to stop making bad decisions that produce the known typical outcomes and start making good decisions, although sometimes the outcomes may not be as expected

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1 Readers who are interested can visit www.informs.org/Community/DAS for more information on the latest advances in the field.

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