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Guest blog by Catherine Hallinan

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Gateway’s CEO, Paul Thomas, is currently on annual leave. In his place, this week’s guest blogger is Catherine Hallinan. Catherine is the Chairman of Gateway Credit Union. Prior to becoming a full-time non-executive director, she enjoyed a long and successful career in the financial services sector in the interconnected worlds of institutional banking, insurance and wealth management. She currently sits on the Board of HCF Life Limited, Lawcover and St. Catherine’s Aged Care Services. 

Decisions, decisions...

We all make decisions, large and small, consequential or trivial, consciously or unconsciously, every day. For simple decisions, some people advocate eliminating any unnecessary steps, like Steve Jobs who famously wore only black sweaters, blue jeans and New Balance sneakers. Others lessen mental effort with things like a weekly menu or daily routine. We adopt methods that limit vast numbers of options so we are not paralysed by choices (like only using the landing page on Google). But decisions that are complex, have high risk consequences and/or have high degrees of uncertainty require more. We may be directed, or confused, by aphorisms such as “trust your gut”, “fortune favours the brave”, “if in doubt, don’t”, “sleep on it”, or “she who hesitates is lost”. Decisions are at the heart of our work lives too, particularly for managers and directors. So how can we make better decisions, especially when it counts?

There is no single decision-making method that guarantees success. The quest for logical and systematic decision-making in business starts with mathematics. Mathematics gives us many useful tools. Probability and optimization help us deal with uncertainty and choice. Models of complex systems help experts analyze and understand the financial and economic environment. Critical path analysis is at the heart of project management. Operations research covers a vast range of problems including transport and queueing problems, peak pricing and inventory management. Some businesses, such as insurance, are based on pricing and forecasting measurable risks and actuaries are prominent. In financial markets, so-called “quants” reign in areas like derivatives where the balance of risk and return is highly uncertain. 

Game Theory extended mathematical decision theory in a new direction. It incorporated social situations, such as how other people may react, to provide insights into decision-making under conflict and cooperation. And whilst this science is useful, it is not complete; indeed most decisions, even in business, are not made this way.

Discoveries in psychology and social sciences add a richness to thinking about decisions that include intuition, heuristics and biases. One of the most influential and readable contributions in this field has been the 2011 book “Thinking, fast and slow” by the psychologist, Daniel Kahneman, a Nobel Laureate in Economics. Kahneman describes a fast, intuitive and emotional system (System 1), and a slower, more deliberative and more logical system (System 2). He contends that most of our decisions are intuitive System 1 decisions, and these are, mostly, on the mark. However, this style of thinking, though involving little effort, is highly prone to predictable biases and illusions. These include overconfidence, where we exaggerate our ability to forecast the future, a susceptibility to habit, trusting extreme predictions and a ”bias to optimism” that overestimates benefits and underestimates costs and risks.

The antidote to these “cognitive traps” involves System 2 thinking, which takes work. It requires us to recognise sources of bias and error and then exert effort (System 2) to address them. Kahneman contends that organisations can make better decisions than individuals precisely because they have the power to implement orderly procedures that enforce quality decision-making. These may be useful checklists, or protocols that insist on data, calculations and explicit analyses of outcomes from similar situations. It may be seeking out diverse or divergent thinkers, or fostering a culture of constructive test and challenge. 

Another useful suggestion is the idea of a “pre-mortem”. When an organisation has almost come to an important decision, but is not yet committed, a group of individuals who are knowledgeable about the decision are gathered. Their task is set out in a short speech.  “Imagine that we are a year into the future. We implemented the plan as it now exists.  The outcome was a disaster. Please take 5 to 10 minutes to write a brief history of that disaster.” The process not only avoids group think, but also legitimises doubt and encourages even supporters of the decision to search for possible threats they had not considered earlier. That is, it forces System 2 thinking. It cannot guarantee that a later post-mortem will not be required, but it does serve to minimize the risk that critical failings occurred because of the way in which decisions were made. That we can so readily recall project disasters, large and small, as easily suggests there is lots of scope for improvement!  

So, in summary, to make good decisions, learn how to avoid making bad ones! 

 

Regards,

Catherine Hallinan

 

Comments

avatar Greg Diment Accountant
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Catherine thank you so much for your blog.
Complex at first blush.
Profoundly simple and helpful at the last paragraph!!
Pre Mortem reviews will now be standard procedure for my small business clients.
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avatar Des Tubridy
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Catherine, this was a very helpful synthesis on decision making. Nice to get a refresher on Kahneman's work. Makes me more conscious about the subconscious process of decision making.
Thank you, Des
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