This Checklist Will Help You To Make Better Decisions

In your job, or in your life, there is one constant that you always need to do: make decisions. Unfortunately, when making a decision, your brain can become clouded and point you in the wrong direction.

How do you make sure that this isn’t the case the next time you are making that huge decision?

“ No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be.”

— Isaac Asimov

Your brain is not always a rational actor

Let’s first analyze a bit how your brain works, and then once you know the theory, you will be able to grasp more effectively what you need to do in order to be a better decision maker.

If you have studied economics, then you probably came across the core assumption that people are rational actors who make decisions that are in their best interest and after a careful analysis.

This assumption always bothered me, since in my experience that’s not how people behaved in real life. Turns out, I wasn’t the only one who had these doubts. Later I came across an economics theory called behavioral economics.

Unlike classical economics which works with the rational actor model, behavioral economics assumes that people are not rational actors and instead fall under the sway of so-called cognitive biases.

Learning about behavioral economics opened up a whole new world for me and gave me a better perspective on how people think, and why they sometimes do the things they do.

“If there is time to reflect, slowing down is likely to be a good idea.”

— Daniel Kahneman

One of the fathers of behavioral economics is a psychologist by the name of Daniel Kahneman, who won a Nobel Prize in Economics for his work. Together with Amos Tversky, they studied how people reason and why they often tend to make mistakes in their thinking.

They came to the conclusion that there are two basic ways that your brain goes about making decisions.

They called these: System 1 and System 2.

System 1 is quick, heavily dependent on emotions and the subconscious, while System 2 is slow, logical and conscious.

System 1 is the one that humans use most of the time and is basically akin to instinct. It evolved millions of years ago in order for your ancestors to be able to make quick decisions in life and death situations.

Luckily, in today’s world, you very rarely face these life and death situations, however you still tend to rely on System 1 thinking even in cases where a more rational approach would make more sense. A lot of times, you don’t even know it.

This often results in you making sub-optimal decisions, which can be a huge problem in many areas of life, including business.

One article in McKinsey Quarterly cites the results of a study which confirm this:

“Our candid conversations with senior executives behind closed doors reveal a similar unease with the quality of decision making and confirm the significant body of research indicating that cognitive biases affect the most important strategic decisions made by the smartest managers in the best companies.

Mergers routinely fail to deliver the expected synergies. Strategic plans often ignore competitive responses. And large investment projects are over budget and over time — over and over again.“

How should you minimize these types of failures? If you want to make a better decision, it often makes sense to take a step back and engage System 2. System 2 thinking is about making a conscious effort to reason through your choices.

An analogy that could help to explain the difference between the two systems is that of a charioteer and horses. The horses are wild, emotional, and hard to control. They are System 1, and often do whatever they want.

However, if you want to get somewhere, they need to be steered in a certain direction. This is where the charioteer or System 2 comes in. In order to get the horses to pull the chariot along a road, he calms down their passions, engages in deliberative reasoning, and steers them in the right direction.

So how do you calm down the passionate horses inside your brain, and put your charioteer hat on in order to engage in deliberative reasoning?

Together with Dan Lovallo (one of the co-authors of the above cited McKinsey article), Daniel Kahneman came up with a 12-point checklist that you can use before you make any significant business decision.

The Rationality Checklist That You Should Implement For Your Projects

This checklist is something that I have used when I am faced with a big decision at work. There are many projects that I have to oversee, and not all of them make sense.

By applying this checklist, I am able to see which biases play a role in the potential go-ahead for the project.

Here are the 12 points you should look at before you pull the trigger and commit to any type of decision:

1) Check for Self-Centered Biases

“If we chase the things that ‘tickle our ears,’ we’ll probably end up finding out that they’re going to ‘torture our lives.”

— Craig Lounsbrough

Self-serving bias is the tendency for people to seek out and interpret information in a way that makes them look better. This happens because humans have an inherent need to try to boost their self-esteem.

This can then cause you to be too optimistic in the belief of the potential success of your plan.

One example of how being overly optimistic for a proposal blinded policy-makers to the potential problems with their plan is what happened in France several years ago.

In 2012, France introduced a 75% tax on the highest tax brackets. The politicians rammed it through because it made them more popular among the populace.

The people behind the plan made very bold predictions on how much money this will bring in. However, when the policy was implemented, the amount of money actually brought in was way below expectations. The law was scrapped just a few years later.

Remedy

Ask yourself this question: Is there any reason to suspect that you are making errors motivated by self-interest?

The way to guard against this type of bias is to always review your proposal carefully, especially trying to see if it is not too overoptimistic.

Seeing things from a wider perspective, considering different factors, and taking a more holistic approach are some of the things that you can do in order to make your predictions more realistic.

Scientific research shows that the way to make more accurate predictions is by considering multiple explanations and then balancing them out.

“Those who preferred to consider multiple explanations and balance them together before making a prediction performed better than those who relied on a single big idea.”

2) Check for the Affect Heuristic

“Pleasant and unpleasant feelings are central to human reasoning, and the affect heuristic comes with lovely biases — some of my favorites.”

— Eliezer Yudkowsky

The affect heuristic happens when you make a gut decision based on some sort of “feeling” that you have. This is usually driven by an emotion such as love, fear or surprise.

One example of this type of decision-making happens in job interviews. You might interview a candidate, and be excited about them, but it turns out that once that person is hired, they become a poor performer.

Scientific research shows that this is a very common occurrence, and the actual performance on the job, has very little to do with the way that person came off at the interview.

Remedy

Ask yourself this question: Have you fallen in love with your proposal?

Making a standard checklist or a list of criteria which you can check off without having your positive or negative feelings affect the decision, can be a better approach to making a more rational decision.

3) Check for Groupthink:

“For it is dangerous to attach one’s self to the crowd in front, and so long as each one of us is more willing to trust another than to judge for himself.”

— Seneca

Groupthink is a psychological phenomenon, where herd mentality takes over and all dissenting opinions are trampled over. This can often be very dangerous.

That’s why you need to take extra care to carefully examine different sides of the issue and solicit other opinions. There are many examples of groupthink leading to the downfall of companies, with one being the story of the decline of Swissar.

The decision-making board of the company once known as the “flying bank”, a nickname earned for its dependability, grew complacent and started making rash decisions based on groupthink.

The performance of the company tanked rapidly, and the airline was then forced to declare bankruptcy in 2002.

Remedy

Ask yourself these two questions: Were there dissenting opinions within the team? Were they explored adequately?

One way to avoid groupthink in decision-making is to play the devil’s advocate. This is when someone takes an opposite position to the majority one and argues its merits.

4) Check for Saliency Bias:

“He who sees the past as surprise free is bound to have a future full of surprises.”

— Amos Tversky

Analogies are sometimes good and sometimes only superficial. That’s why you need to take extra care when using them.

Using bad analogies was one of the reasons why Enron ended up going bankrupt. The company that would later become the poster boy of corporate greed initially grew successful working with the natural gas market in the 1980’s.

This success led it to try to search for markets with similar characteristics. This analogy made them enter markets like the energy market, trucking, and broadband, which on surface had many similarities to the natural gas market.

However, deep down there were some fundamental differences, which Enron did not take into account. When these markets started behaving in unpredictable ways, the company started accumulating huge losses, which then precipitated its dramatic fall.

Remedy

Ask yourself this question: Could the diagnosis be overly influenced by an analogy to a memorable success?

Don’t rely on only one analogy, but instead try to come up with several analogies and try to analyze how similar (and different) they are to the current situation.

If the analogies don’t fit, then you might have to resort to first-principles thinking.

5) Check for Confirmation Bias:

“People are always clinging to what they want to hear, discarding the evidence that doesn’t fit with their beliefs, giving greater weight to evidence that does.”

— Paula Stokes

Sometimes people have blinders on and only see the evidence that they want to see and which confirms their pre-conceived notions. This makes them discard any information that points to the contrary. In order to avoid this, you should always try to seek out opinions that differ from your own and request additional options.

Confirmation bias can be quite destructive. By discounting information which counters your ideas, you are potentially digging a deep hole for yourself. This type of thinking was what was behind the disastrous decision by the Bush administration to invade Iraq in 2003.

A presidential report from 2005 summarized what went wrong, demonstrating how deeply confirmation bias had overtaken the leadership:

“ Indeed, it appears that in some instances analysts’ presumptions were so firm that they simply disregarded evidence that did not support their hypotheses. As we saw in several instances, when confronted with evidence that indicated Iraq did not have WMD, analysts tended to discount such information.

Rather than weighing the evidence independently, analysts accepted information that fit the prevailing theory and rejected information that contradicted it.

While analysts must adopt some frame of reference to interpret the flood of data they see, their baseline assumptions must be flexible enough to permit revision by discordant information.”

Remedy

Ask yourself this question: Are credible alternatives included along with the recommendation?

6) Check for Availability Bias:

“ People tend to assess the relative importance of issues by the ease with which they are retrieved from memory — and this is largely determined by the extent of coverage in the media.”

— Daniel Kahneman

Availability bias relies on immediate examples that come to mind and sometimes tends to forget that there might be some other things at play.

This can result in poor decision-making as various studies have shown:

“Consider the common tendency of workers to load their retirement portfolios with stocks of their own company — a strategy that makes little sense in terms of risk diversification given the likely coincidence of job loss and poor performance by the company.”

Remedy

Ask yourself this question: If you had to make this decision again in a year’s time, what information would you want, and can you get more of it now?

Sometimes it makes sense to draw up standard checklists of the data that you need to have in order to make this decision. If you have these checklists, then it will be easier for you not to forget some crucial piece of information.

7) Check for Anchoring Bias:

“Random, and not so random, anchors that we encountered along the way and were swayed by remain with us long after the initial decision itself.”

— Dan Ariely

The anchoring effect is very powerful and can easily sway the perception of people. That’s why it is often used in negotiations. In order to minimize its effect, you should re-anchor your analysis with figures generated by other models or benchmarks, and request new analysis.

Anchoring bias is often used by salespeople to sell you expensive stuff. For example, if you go to a store and see a 70 dollar belt, you probably won’t buy it.

However, if you already bought a suit for 600 dollars, that 70 dollar price looks much better in comparison. If you buy the suit, you will probably end up buying the belt too.

Anchoring bias can also affect the way you think about the costs of a project. You might balk at a project costing 1 million dollars if you get offered it alone, however if previously you were offered a project for 30 million dollars, the million seems like peanuts.

When you have several price reference points, you are more likely to approve the million dollar project than if you are offered it on its own. You need to watch out for this.

Remedy

Ask yourself these questions: Do you know where the numbers came from? Can there be unsubstantiated numbers? Or maybe an extrapolation from history? Or maybe a motivation to use a certain anchor?

8) Check for Halo Effect:

“If you select companies on the basis of outcomes — whether success or failure — and then gather data that are biased by those outcomes, you’ll never know what drives performance.

You’ll only know how high performers or low performers are described.”

— Philip M. Rosenzweig

The halo effect sometimes relies on survivor bias when examining issues, and doesn’t really take into account other factors. The halo effect can sometimes happen when a company brings in a new celebrity CEO, who had a lot of success in another company. They think that he can recreate the success in the new company as well. Often, that is not the case.

Ron Johnson experienced a lot of success at the top positions at Target, and then Apple, where he was behind the stunning rise of that company by introducing the Apple retail store concept. Based on this success, he was then hired by J.C. Penney as its CEO.

This is what the former CEO of Sears Canada, Mark Cohen, had to say about Johnson:

“There is nothing good to say about what he’s done. Penney had been run into a ditch when he took it over. But, rather than getting it back on the road, he’s essentially set it on fire.”

Remedy

Ask yourself this question: Are you assuming that a person, organization, or approach that is successful in one area will be just as successful in another?

In order to minimize halo effect, try to come up with a list of the different factors that could be at play in a situation. Especially keep in mind what a person can actually affect, and what is largely outside their locus of control.

9) Check for Sunk-Cost Fallacy, Endowment Effect:

“No matter how far you’ve gone down the wrong road, turn back.”

— Turkish proverb

The sunk-cost effect was one of the reasons why the French and British governments continued developing the Concorde plane, a supersonic airliner, even when analysis showed that it would never make any money.

The original cost estimate for the development of the plane was 70 million British pounds. The final bill for the development was around 1.3 billion!

If the decision-makers had not been blinded by the sunk-cost fallacy, they would have ended the project way earlier, before all that money was spent.

Instead, they kept on piling more and more money onto the project in order to justify their previous costs. What often happens in cases such as these, is the escalation of commitment.

The people working on the project are facing a negative outcome (potentially losing their jobs and prestige), and instead of stopping the project, continue putting more money and effort into in, hoping that things will somehow turn around.

This is what happened on the Concorde project. No one wanted to make the decision of stopping the project and facing the criticism why so much money was spent on something that didn’t even end up being developed.

While the jet did get into production and flew several flights, it was plagued by so many problems that the airlines that owned it ended up discontinuing using it. They lost a lot of money on this.

To combat this, always start with a fresh perspective, ask questions and examine the situation from different angles. What type of a decision would you make, if you disregarded the issues arising from past decisions?

Researchers who did a meta-analysis studying the sunk-cost fallacy made these suggestions:

“In progress decisions, companies should pay attention to long running projects and the managers’ increasing tendency to stick to their initial decision as time goes by.

In line with research on escalation of commitment, barriers can be implemented that activate a decision-maker’s need to externally justify the project-related decisions or distribute responsibility to various decision-makers.”

Remedy

Ask yourself this question: Are you overly attached to a history of past decisions?

10) Check for Overconfidence, Planning Fallacy, Optimistic Biases, Competitor Neglect:

“Many a man has gotten himself killed by believing his own press.”

— Bill Willingham

Sometimes you want something to happen, so in your mind you become over-confident and think that the chances of that happening are close to 100%. You also underestimate the challenges in front of you. Everything seems easy.

The planning fallacy is quite common in project management. Often, the amount of time it takes to finish a task is underestimated. For example in IT projects, projects running overtime or overbudget are quite common.

The consulting company McKinsey estimated that almost half of all large IT projects are overbudget:

“On average, large IT projects run 45 percent over budget and 7 percent over time, while delivering 56 percent less value than predicted.”

Try to mitigate these problems by taking a different view, focus on the challenges and re-examine your assumptions.

Remedy

Ask yourself this question: Is the base case overly optimistic?

11) Check for Disaster Neglect:

“ I know that history is going to be dominated by an improbable event, I just don’t know what that event will be.”

— Nassim Taleb

Sometimes people are not pessimistic enough with their worst-case scenario. Instead what you need to do is be realistic and plan ahead as if the worst-case scenario already happened.

This strategy is called the pre-mortem. In this type of analysis you behave as if the worst-case scenario happened and you develop a story about its causes. Worst case scenarios do strike sometimes, with one example being the 2008 economic crisis.

For most banks, businesses, and governments this was a “black swan event”, something that they did not predict or prepare for, and which ended up causing huge havoc on the world economy.

We might be living through an example of the lack of foresight and worst-case scenario preparation with the current global coronavirus pandemic. It is showing that governments around the world did not engage in worst-case thinking and did not prepare sufficiently for the potential of an outbreak this bad.

In the US, under the current administration, the pandemic preparedness team was dismantled and calls to prepare for such a catastrophe were not answered.

“Public health advocates have been ringing alarm bells to no avail. Klain has been warning for two years that the United States was in grave danger should a pandemic emerge.”

Linked to this worst case scenario is also something that many people have been experiencing right now. My place of work has the ability to support a certain number of working from home.

The problem is, that they never foresaw a scenario where everyone would HAVE TO work from home. The server has been crashing and nobody can connect.

Remedy

Ask yourself this question: Is the worst case bad enough?

12) Check for Loss Aversion:

“The fear of losing, known as ‘loss aversion,’ trumps the joy of winning in most situations, and this imbalance frequently causes people to make poor choices.”

— Douglas Goldstein

Most people have an aversion to risk. That’s why they tend not to take risky options, even if these have a huge upside. To combat this, you should realign incentives to share responsibility for the risk or to remove the risk in the first place.

While taking on too much risk is bad, not taking any risk is also not always the best strategy. There are many examples of companies that were leaders in their fields, but which stopped innovating, only to be overtaken by more innovative upstarts.

One warning story of how high risk aversion can sink a company is that of Kodak. Once, a paragon of photography, it had sunk so low that in 2012, it had to file for bankruptcy.

The reason was high risk aversion as its dominant strategy:

“Kodak’s central challenge was that it was never willing to risk adjusting its business model to accommodate the very digital technologies it had invented.”

Remedy

Ask yourself this question: Are you being too cautious?

Note: This is a revised version of a post that was originally published on my blog.