“Robust decision processes help us to make better decisions in all conditions, not just under volatility and uncertainty.”
Much has been made of the challenges faced by decision makers in what seems to be an increasingly volatile and uncertain world, with ever more complex decision solutions and technologies being developed and offered every day. However, in the rush to solve the problems posed by uncertainty and ambiguity, two fundamental factors are often ignored: First, most decisions are not taken under conditions of uncertainty and second, many disastrous decisions result not from uncertainty or ambiguitybut from a simple judgement error or bias which gets compounded and triggers a chain of mistakes. Building robust decision processes helps us to make better decisions in all conditions, not just under volatility and uncertainty.
Two of the most important factors in determining how we make decisions are the types of information we use as our inputs and the environment in which we are making decisions.
There are three main information conditions we encounter when we make decisions: Certainty, uncertainty, and risk. All these conditions are affected by a combination of intrinsic and extrinsic factors and, consequently, they can all leave decision makers exposed to judgement errors and cognitive biases.
“We can make judgement errors, even under conditions of relative certainty.”
A decision is made under conditions of certainty, when the objective of the decision is known, the possible outcomes of the options are known, and the likelihood of those outcomes are known. And yet, even with all this information, we still make mistakes and, as research has shown, we may even make inconsistent choices with a fixed set of inputs.
The reason for this is no decision is ever truly made in isolation, which means that the conditions under which the decision is made will inevitably vary, even if the decision parameters do not. Our mood, our physical or mental state, or even the weather can affect our judgement and subsequent behaviour. For example, social pressures can cause us to make decisions which are not optimal simply because of the influence of other people, even though we can see the decision is wrong.
When we are not sure about the outcome of a decision, but we think can assign a reasonable estimate of probability to the various possibilities, the decision is said to be taken under conditions of risk. Here, we become exposed to further biases which affect our ability to judge probabilities correctly. Our risk preferences are fickle; for example, we weigh the cost of losses higher than the value of gains. We estimate risks differently over time. Overconfidence is often a problem.
Information overload is another major factor in risky decisions. Research has shown that the amount of information we use to make decisions follows an inverted-U shape. Initially, as the amount of data available to us increases, we use more inputs in our decisions. But, beyond a certain point, the number of factors that we use in our decisions starts to decline. Once we become truly overloaded, we only use a very small percentage of the available information in our choices, and the way we select our inputs is prone to issues like confirmation bias or outcome bias.
“Once we are overloaded with information, or our frame of reference becomes unclear, we are exposed to a great number of potential biases.”
When we can't estimate the probability of an outcome or are unable to see what all the possible outcomes are, we are making decisions under conditions of uncertainty. Here the potential for biases to affect our judgement are myriad. Uncertainty leads to a feeling of unease, or dissonance, in our minds and we look for ways to make sense of it all.
When we don't have the reference framework of measurable outcomes or probabilities, we resort to short cuts (known as heuristics) to help us make decisions. Heuristics can be highly effective, but they may also leave us open to cognitive biases.
When one particular outcome comes to mind more readily than another, we are likely to overestimate its likelihood, this is known as the availability bias. We may make judgements about the probability of a given outcome based on a gut-feeling orinstinct about how the situation should play out, which is known as representativeness. This can be hugely misleading when conditions are changing rapidly. Anchoring is another heuristic whichcan lead to biased judgement.
Our personal preferences for time and risk are a function of our evolution; we overweight the importanceof the present relative to the future and we fear losses more than we value gains. This means avoiding a loss in the near-term will hugely outweigh our evaluation of potential future gains. We can also be heavily influenced by others and our own emotions and internal motivations play a huge part.
On top of these information conditions, there are a series of interconnected environments and climates affecting how we make judgements and decisions. No decision is ever made in isolation; there are multiple factors which can alter a judgement or influence the outcome of a decision. Some are directly related to the decision task, but many are not. Decision processes must be assessed across three different domains:
This is everything that directly affects the decision. It is the task goals, the structure and complexity of the task, the time available to complete the task, and the expected possible outcomes of the decision. It also includes all the people involved in the decision as well as other key stakeholders.
“When people have lots going on in their lives, outside their organisation, their judgement is affected. But we can’t always see this, which makes it hard to predict how they will behave under pressure.”
This includes anything which might affect the mood, emotions, motivation, or reasoning of the decision maker but is not directly linked to the decision. This could include things like personal relationships, financial troubles, general anxiety, stress, or health concerns. This layer is often invisible to anyone other than the affected party, which makes it extremely difficult to predict other people’s behaviour under pressure. This is where decisions under certainty often go wrong.
This is the perception that the decision maker has about how others would act in similar circumstances. The influence of group or social norms on our behaviour is immense. This layer is a critical component of behavioural decision making. Being under pressure in the decision climate can create the conditions for irrational choices, but whether the action is carried out often depends on our perceptions of what other people would do.
“A robust decision process can help us mitigate all these problems; de-biasing judgements, and creating a sustainable, high performance decision environment.”
Behavioural science can help us improve the quality of our decision processes and outcomes by helping us see and correct our biases or, where appropriate, influencing or “nudging” decision makers in the right direction.
At the context level, building a robust and unbiased decision framework is crucial. We need to ensure that the attributes on which we are making our judgements are relevant to the task and that they are not affected by biases.
We can build an effective choice architecture which guides the decision maker towards the best option. If necessary, we can build nudges into the choice architecture. We can also ensure that incentives and goal setting processes are consistent and aligned with the task needs.
At the climate level, psychological safety, is hugely important. Building an environment in which people feel comfortable raising tough issues, asking for help, learning from mistakes, and experimenting and innovating without fear of being ridiculed, marginalised, or penalized will reduce risk and improve performance.
At the culture level, the transmission of messages and the conveyance of behavioural norms is critical. As our working environment becomes increasingly fragmented and de-centralised, this is becoming an ever more important factor. Creating the right organisational culture is a vital component of creating a robust decision framework.
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