CHAPTER 2
How Do Business Executives Make Decisions?
(Do Rules of Thumb Count?)
It Is Lonely at the Top
As an executive of a small- or medium-sized business, you can seldom rely on peer support from inside your organization when you need to make strategic business decisions. Indeed, it may be difficult for you to share with your managers or employees some of the issues your business is facing.
You cannot discuss various matters with your senior staff because it may affect them positively or negatively; you cannot discuss those issues with your colleagues from other companies for competitive reasons. Your board members (when you have a board) can give you moral support and some form of mentorship, although not enough to address the daily predicaments you are facing.
What are you to do?
Repeatedly, you end up using your gut feelingi and take your chances.11 Sometimes you are right, sometimes not. These are hit-and-miss situations.
Vignette: The Doctor Knew Right Away
My partner and I met Dr. James in the boardroom. He was representing an investment network from Vancouver and came to visit us in Victoria to have a better “feel” of the investment opportunity our company could provide to his business partners.
Dr. James wanted us to introduce him to our key managers. We asked three of them to join us briefly in the boardroom.
Daniel came in first. He was a project manager presently dealing with some challenging issues that he described for us. Daniel had extensive project management experience in the construction of medium-sized vessels and was in charge of a major project that was showing some signs of weakness. Daniel was always serious and professional. Walter came in second. He was very jovial and friendly, as usual. He talked about the marketing and sales he was supervising. Nicolas came in last. He was busy with the yard operations and was in a hurry; therefore, he stayed very shortly.
Once they left, Dr. James turned to my partner and me, and said:
I would not trust Daniel. He tries to please everybody. Walter is very fond of the company and a bit uneasy because he does not understand what you want to achieve. Nicolas is highly defensive and does not trust anybody.
My partner and I looked at each other. We were taken aback by those comments. The doctor has “read” our managers the same way as we had. Nonetheless, he has done this having seen and spoken to them for only a few minutes.
“How did you find this out?” I had to ask.
“When you are a doctor you meet dozens of people per day. After 30 years you learn how to read them quite well very fast,” Dr. James answered.
My ability to deduce or intuit the thinking processes of other people has taken me years of practice, and at that point I was still unsure I could rely on this skill. Dr. James knew right away.
When Dr. James left, my partner and I were left with an uneasy feeling: What are we to do with this newfound (confirmed) knowledge?
We did nothing right away. Time helped us make the required decisions based on each individual’s performance.
Trust your instinct.
Theoretical, Vicarious, and Experience-Based Decisions
The decision-making funnel includes three main input streams: The first is personal experience stream, followed by a vicarious experience stream, and finally a theoretical stream.
Decisions based on personal experience are often those with which one is most comfortable. One navigates in known territory. The level of anxiety is low. The confidence level of decision is high.
Vicarious, experience-based decisions include those we hear about in case-based learning, problem-based readings, and business conferences we have attended. These also include situations we talk about with our colleagues over a cup of coffee and, occasionally, what we read or hear on the news.
Theoretical experience is gleaned from the old-fashioned world. It is a form of book-learning experience. In modern days, this means probably more focus on multimedia and less on books. Anyhow, theoretical experience is the acquisition of those building blocks of business cases that you have not seen and that are intended to prepare you to recognize those situations when they come up. Therefore, you start with readings, podcasts, videos, and lectures. The idea is that if we spend sufficient time managing our business, going to conferences, and reading business books, we are going to pop out at the other end of the business education funnel with more business-decision expertise.
Let us throw a few monkey wrenches into this, because it is not so much what experience we have, but how we store and retrieve it.
When we think about how we access our experience, it is important to understand that this access is a function of memory. Therefore, if I hear about a business situation, take care of a business situation, and read about a business situation, I have to somehow store the information related to it. Experience is stored in the brain as a gist.ii Experience is not stored as verbatim, word-for-word information; experience is a gist usually referred to as the essence, the central idea or main substance of the experience. The brain likes to have something that is simple, short, consistent, and logical. If you do not have the details in your brain, your brain is likely to make them up for you because it likes a complete picture.
As we get experienced, we make gist collections. We think, “I remember this gist from a previous case,” and “I have seen it again this time,” and eventually, “I have a stereotyped business script.” Essentially, a business script is a pattern matching one that an expert should be able to recognize immediately. So when you come out the other end of your decision-making journey, you say to yourself without a whole lot of thinking, “Aha! I know what that is. I can retrieve it from my memory.” It matches your business script, and you make your decision.
Lessons Learned: Heuristics
The business decisions one makes are frequently based on one’s experience (or the lack of it), and some heuristics or rules of thumb learned or that were suggested to peers, or based on the content of various business magazines, articles, and books (like this one).
An interesting result from my doctoral research suggests that very few business decisions follow standard academic analytical processes. Another surprising finding is that one typically tends not to use online sources when looking for daily solutions to business problems. Instead one prefers to use one’s business scripts and one’s existing social network.
Use your social network.
iDrawing on a decade of research at the Max Planck Institute for Human Development, Gigerenzer demonstrates that gut feelings are the result of unconscious mental processes—processes by applying rules of thumb that are derived from our environment and experiences. The value of these unconscious rules lies precisely in their difference from rational analysis—they take into account only the most useful bits of information rather than attempting to evaluate all possible factors. By examining various decisions we make—how we choose a spouse, a stock, a medical procedure, or the answer to a million-dollar game show question—Gigerenzer shows how gut feelings not only lead to good practical decisions but also underlie the moral choices that make our society function. (Source: ©2007 Gerd Gigerenzer; (P)2007 Tantor Media Inc. Adapted from the Publisher’s Summary.)
iiIn information science, GIST is an upper ontology (also known as a top-level ontology or foundation ontology) that consists of very general terms (such as “object,” “property,” “relation”) that are common across all domains. (Source: https://en.wikipedia.org/wiki/Upper_ontology.)