I don’t have to tell you that making good decisions is important both in business and your personal life. What you may not know is that we have a scientific field developing decision-making methods based on mathematics with the singular goal of helping you make better decision.
But why on Earth should you bother with complicated mathematical formulas instead of relying on our gut instincts? True, gut instincts are useful. If you simply need to buy something to eat, pulling out Excel to determine the optimal decision is an overkill. And even worse, if you find yourself in a fight, you simple don’t have the time for a detailed analysis.
But our intuitions and reflexes are not silver bullets. They can make mistakes, especially when solving problems our ancestors from 10 thousand years ago didn’t have to deal with. In such situations, formal decision-making methods based on some interesting mathematics can help you make better choices. Here are six reasons why.
1. Cognitive biases
We often see ourselves as rational beings that always make logical decisions. But the reality is very distant from this wishful thinking. All of us are easily influenced by cognitive biases that distort our judgment and decrease the quality of our decisions.
Behavioral economists study the impacts of cognitive biases on our decisions. They have identified several biases and fallacies causing us to make suboptimal decisions.
Anchoring is a well-known example. When you try to estimate an unknown quantity, you unconsciously start with an anchor — some number you already know. For example, to estimate the population of a city, you can use the population of your hometown. You then use available information to adjust this anchor. If you know that the city is your country’s capital, you may increase the estimate.
At a first glance, anchoring is reasonable strategy. The problem is that the adjustments we make are often inadequate. If the population of your hometown is smaller than that of the foreign city, your estimate stays under the real value even after adjustment.
Tools such as multiple criteria decision-making methods help us mitigate such issues. For instance, when choosing a new laptop, we may be fixated on a single criterion such as price. We may know that our friend recently bought a laptop for $1000 and is quite happy with his choice. This number becomes an anchor and causes us to think that a laptop costing $1300 is too expensive. But if we instead consider multiple criteria, we may be able to make a more informed choice. Adding criterias like storage capacity, performance, or even appearance, can reduce our fixation price.
If you are interested in other cognitive biases, check out Thinking, Fast and Slow, Nudge or Misbehaving.
2. Better decisions lead to successful projects
Good decision-making increases the chance of success of a project. This is the conclusion of a 2015 PMI study titled “Capturing the Value of Project Management through Decision Making“. The authors examine 3 factors influencing the quality of organizational decisions. One of them is the implementation of formal decision-making processes:
74 percent of projects [that used formal decision-making processes] meet goals and business intent vs. 57 percent of those that don’t have a decision-making process in play.
Another argument in favor of decision-making processes in the study is leader overconfidence:
Leaders typically have a bias for action so they like making decisions, and often do so with a strong sense of certainty. And yet, anyone with experience knows that their decisions are often ill-informed, biased, over-optimistic and sometimes just plain wrong.
The report suggests that spending some time analyzing a problem with formal decision-making methods could save you a lot of trouble in the future. The study focuses on organizations, but its findings may be useful for smaller personal projects as well.
3. Decision-making methods help you communicate
Decision-making is often a social activity. Even in our personal lives, we often discuss our decisions with friends and family. According to a Business News Daily article, some managers believe that the most important benefit of formal decision-making methods is not their output, but rather the collaboration and knowledge sharing they enable.
Many methods use a decision matrix to represent a decision problem. A decision matrix is a simple table with rows representing options and columns representing either different evaluation criteria or possible future developments. Even if you think that complex decision-making methods are not worth the time, simple tools like the decision matrix can help you discuss the decision problem and its solution with others.
4. The principal-agent problem
The principal-agent problem is a situation in which an entity called a principal delegates some of its responsibilities to an agent. The relationship between investors and managers of a company is a typical example. Investors provide capital to managers who then run a company on their behalf. The goal of an investor is, of course, profit.
Agents should make decisions beneficial to principals (and get paid for doing so). But in practice, an agent may have incentives to act against the interests of the principal. Such conflicts may arise when deciding whether or not to undertake a risky project. Investors are more willing to accept the risk because they usually have a diversified investment portfolio. On the other hand, higher risk means a higher chance of failure, which can damage the manager’s reputation.
According to the aforementioned Business News Daily article, more formal decision-making processes can force managers to make decisions that are better for the investors. Investors can force managers to use formal decision-making methods, document the process, and only make decisions that implement these constraints.
5. Turning subjective preferences into numbers
Quantifying subjective preferences — expressing them as numbers, is useful in many situations. You can do a lot with your preferences when expressed numerically. For example, I have used Saaty’s pairwise comparison approach to solve or at least understand several decision problems.
I taught some university coureses where students worked on a group project. I later had to grade these projects. I knew how many points I am allowed to give for the project as a whole. But there were no guidelines on how to distribute these points between different parts of the projects. So I solved this problem with Saaty’s pairwise comparison. It allowed me to convert my subjective opinions about the importance of different parts of the project into numbers, and grade more fairly and efficiently.
The second example involves investments. I invest some part of my monthly income into stocks. When making investment decisions, people usually consider two main factors — risk and potential profit. But recently I also started thinking about the societal benefit of different industries. I was again able to use Saaty’s pairwise comparison to quantify these preferences. The method gave me very specific recommendataions: Invest about 23% of your assets into the Technology sector, and only 2.6% in the Consumer Defensive sector.
6. Keeping you emotions in check
Research cited in a Harward Business Review article suggests that we make worse decision when we are emotional. This is especially true when our emotions are at their peak. Anger can turn us into simplistic thinkers who seek quick solutions to complex problems. Positive mood can be harmful too. Happy people tend to ignore information quality and base their decisions on the attractiveness or likeability of the source.
Decision-making methods can help you balance the scales. I think that the process of analysis itself has a certain calming effect. When I get upset about something, trying to find a reasonable explanation for a given situation tames my emotions.
Beware of analysis paralysis
So far, I’ve discussed only the benefits of decision-making methods. It is only fair to also mention some of their problems. One of the most mischievous is analysis paralysis – constantly postponing your decisions to gather more information and analyze the problem again. Formal decision-making methods can increase the likelihood that you end up in this vicious cycle.
Keep in mind that there is no such thing as a perfect decision. It is often better to make an imperfect choice than no choice at all. Making at least some choice reduces uncertainty, which means less stress for you, your friends and family, or your employees and investors.
If you are interested in other common problems related to decision-making, I suggest you check out this HBR post.
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