Perhaps the most vital leadership quality is being a good decision-maker. This especially applies to tough decisions that have a lasting impact on the trajectory of your business. Anyone can make simple decisions regarding what to wear, which restaurant to visit for lunch, or how to arrange the furniture in their office, but mastering the process of making tough decisions separates great leaders from mediocre ones.
Establishing a Constructive Decision-Making Environment
Positive and negative decision-making environments are like night and day. Have ever found yourself in a work meeting in which no one seems to be on the same page, everyone is talking over one another, and the attendees aren’t even clear what the topic at hand is? Often when the meeting is over, you’re even further from a consensus than when it started. That gives you an idea of what a negative decision-making environment looks and feels like.
To establish a positive decision-making environment, first get everyone on the same page by briefing them on the topic at hand. What is the problem you’re trying to solve? Is there an end result you’re hoping to realize? What are some obstacles you’ve identified that are in your way? Now that the issue is on the table, you can attack it with everyone working together and not against one another.
Next, set some ground rules for the debate and discussion process. Perhaps you know up front that certain employees sit on opposite sides of the issue. Preempt the conversation from devolving into bickering by establishing a protocol for discussing opposing ideas. Take a cue from political debates, in which one candidate receives an allotted time to make a statement without interruption, then the other gets a certain amount of time to respond. A format like this not only prevents chaos from taking hold, it also ensures that everyone, not just those with the loudest and most commanding voices, is heard.
Identifying Elements That Inhibit Successful Decision-Making
Several issues can inhibit successful decision-making. As a business leader, your responsibility is to know what these elements are and prevent them from taking hold in your decision-making process. If you’re not sure what’s getting in the way of quality decision-making in your company, sit back and observe the process as objectively as possible. You might also ask your employees what they notice about how you make decisions. Those insights can help you figure out which issues you’re dealing with at the office.
Avoiding Decision Traps
Decision-making would be a challenging task even if people could be completely logical about it, but in reality it’s even tougher because everyone is prone to decision traps. These traps are flaws in the decision-making process that come from the mind’s tendency to follow certain routines. For minor, everyday decisions, routines come in handy. When you need to make crucial choices for your small business, it’s important to be aware of these decision traps and know how to avoid them.
Too Much or Too Little Information
To make an important decision, you need all the relevant facts. When you have glaring information gaps, it’s human nature to fill the void with your preconceived notions, which are often wrong. Before meeting to discuss a big decision, conduct research so you can present all the facts to the group up front. If you find in the middle of making a decision you don’t have all the facts, hold off on the decision until you can get the data you need.
An excess of information can be as big a problem as not enough information. The issue with too much information is that the important facts get bogged down in a heap of minutiae. Again, it’s on you as the leader to keep this from happening. Maintain focus by emphasizing what’s important and keeping irrelevant details from muddling the conversation.
Avoiding Decision Bias
A decision bias is a mistake in decision-making due to improper reasoning, evaluation, memory, or simply personal preference. Since people make numerous decisions every day, it’s vitally important that small business owners and employees understand the decision biases that frequently occur. Simply being aware of certain decision biases may be enough to help mitigate their risks.
Anchoring refers to a person’s bias to be over-reliant on the first piece of information they come across regarding an issue. For example, in salary negotiations for a new employee, the conversation and process often center on the first number brought up by either either side of the table. That first number serves as the anchor for possible salary ranges and adjustments to those ranges, when in fact, it may be completely inaccurate.
Information bias is the tendency to seek out and gather more information when that information doesn’t actually affect further actions, predictions, or analysis. Imagine that when analyzing the potential market for a new product, it’s possible to make an accurate decision about the product by gathering data on three major metrics. However, you may spend an unnecessary amount of time gathering data on 10 additional minor metrics when you can make a more accurate decision with less information. In analysis scenarios, business owners need to be aware of this bias to save energy, time, and money.
The ostrich effect is the tendency for people to ignore negative or dangerous information or situations. The term gets its name from the myth that ostriches bury their heads in the sand to avoid dangerous situations. Employees may ignore negative situations with co-workers, bosses, customers, or vendors simply because they don’t want to deal with the hassle. When it comes to decision-making, the ostrich effect might cause you to ignore negative information or risky decisions. Instead of confronting the negativity head-on, you pretend like it doesn’t exist.
Social Desirability Bias
Social desirability bias refers to over-reporting socially desirable characteristics or behaviours in oneself and under-reporting less desirable characteristics or behaviours. In business, this can often arise during employee self-evaluations. Perhaps an employee reports a high level of proficiency with certain software, great teamwork skills, and a surpassed production quota. But that same report fails to indicate accurately how often the employee arrives late to the office or the number of sloppy mistakes the employee makes.
Overconfidence bias refers to people’s overconfidence in their own abilities, performance, level of control, chances of success, and reliability of judgment. Overconfidence in the workplace can lead to a variety of problems and even accidents. When discussing projects and timelines with employees and deciding on success metrics, it may be wise to be more conservative; overconfidence bias can affect metric values.
Confirmation bias is the tendency to look for and favour evidence that supports one side of an argument or decision. In business, this can lead to ill-informed decisions. For example, if you believe in a new product idea, you may subconsciously favour data supporting the idea and subject evidence against the idea to much more intense scrutiny. It seems like you’re going through a reasonable decision-making process, but you’ve actually already made the decision.
It’s natural to lean towards one option. While your gut instinct may be correct, you need to be objective in your evaluation. Try to figure out honestly if you’re comparing the evidence fairly. This is also an area in which having good advisers makes a big difference. You need people who are willing to share their honest opinions, not “yes-men” who always agree with you.
Sticking to the Status Quo
Human beings are naturally resistant to change. The old adage, “If it ain’t broke, don’t fix it,” gets reliably trotted out whenever a looming decision presents the possibility of upheaval to the status quo. In a fast-moving economy, however, sometimes things that don’t appear broken still need fixing, or at least updating. Payphones worked fine in the mid-1990s, but companies that didn’t update their business model as technology evolved found themselves behind the curve or, in some cases, out of business.
The status quo is the known quantity, and alternatives are unknowns. If your business always sticks to the status quo, it’s likely going to miss out on growth opportunities. Just consider where Apple would be if it stuck to computers instead of going into MP3 players, phones, and tablets. When you’re evaluating a decision, be realistic about what’s required to break away from the status quo. It’s easy to exaggerate and argue against making a change, but try to think about which option you would choose if you were starting fresh and there wasn’t a status quo option available.
The Sunk Cost Fallacy
Everyone has a fear of loss hardwired into their brain. One area that this fear of loss negatively impacts decision-making is sunk costs, meaning anything you’ve already paid for or committed to. When you do this, you get attached to that previous choice because you don’t want to feel that you’re making the wrong decision and losing your original investment. If you release a new product that loses money, the sunk cost fallacy could cause you to stick with it since you already paid money to design and market it.
One effective way to avoid this is getting the opinion of people who weren’t involved in the original decision. Since they don’t have any sunk costs, they can provide an unbiased perspective.
Running and growing a small business requires you to make decisions every day. Successful companies utilize rational and analytical decision-making because it helps overcome cloudy judgement and biases that naturally occur in a person’s thinking. The best way to make rational decisions is to use one of the many decision-making models available to you. Rational decision-making with models uses data and some process of analysis to come up with a best decision to make out of possible choices, and it doesn’t have to be complicated or daunting at all.
The key for your business is to start using a few different decision models and decide which ones work well for you. Find a few decision models that seem interesting, then test them out for a few weeks or months. Measure the progress in your business. If those models are working for you, keep them. If not, try some new ones. Rest assured that by using the right decision models, you make better business decisions.
A popular model used in small businesses is the Eisenhower Matrix developed by Dwight D. Eisenhower, the 34th President of the United States. On a sheet of paper, draw two lines to form a two-by-two grid. You label the top row of this grid “Important” and the bottom row “Not Important.” Label the first column of the grid “Urgent” and the second column “Not Urgent.” Next, list all your tasks and categorize them into one of the four quadrants: “Important-Urgent,” “Important-Not Urgent,” “Not Important-Urgent,” and “Not Important-Not Urgent.” The tasks in the first category should be done as soon as possible. The “Important-Not Urgent” tasks need to be done but can wait; schedule them on your calendar now. You can delegate the tasks that aren’t so important but are urgent, and the final category of tasks shouldn’t be done at all.
Famous billionaire Jeff Bezos utilizes what he calls a regret-minimization framework to make important decisions by focusing on the long term in a unique way. The concept starts by asking if you will regret not doing whatever the decision is in X years. You then try to imagine yourself at that age and try to reflect on the decision you’re making from that perspective. Often when you make a decision, you’re focusing on your current perspective. This could let potential roadblocks or fears right now stop you from pursuing an opportunity. As you get older, you may look back on your life and regret decisions or missed opportunities. This framework encourages you to anticipate those regrets before they happen to minimize them.
Circle of Competence
Warren Buffett uses a model known as the circle of competence. The point of this is to focus your efforts in the areas in which you are most competent. You have knowledge in certain areas based on the things you’ve done, your work experience, your areas of study, and other methods. That creates your circle of competence. The idea is to stick with the areas where you have that experience. When you’re making decisions or choosing investments, consider whether or not that idea falls within your circle of competence.
Using Expected Values
Expected value is a statistical concept you can use to make better business decisions. Expected value is the anticipated value of a given investment, scenario, or outcome. It’s calculated by multiplying each possible outcome by the likelihood of that outcome occurring, then adding up those results.
As a basic example, imagine a six-sided die with values of 1 through 6. If a person rolls the die, the probability of each side landing face-up is one-sixth. To find the expected value of a single roll, multiply each outcome by its probability and sum them: (1/6 x 1) + (1/6 x 2) + (1/6 x 3) + (1/6 x 4) + (1/6 x 5) + (1/6 x 6) = 3.5. With equally likely outcomes, the expected value is the average of all values.
Business owners can use this concept to make decisions about which projects to pursue. A higher expected value means a better project. For example, imagine the following two projects:
- Project A: 10% chance of making $100,000, 40% chance of making $20,000, 50% chance of making $15,000
- Project B: 10% chance of making $175,000, 40% chance of making $15,000, 50% chance of making $5,000
The expected values are calculated as:
- Project A (EV) = (0.1 x $100,000) + (0.4 x $20,000) + (0.5 x $15,000) = $25,500
- Project B (EV) = (0.1 x $175,000) + (0.4 x $15,000) + (0.5 x $5,000) = $26,000
Project B has the higher expected value, which means it may be the best option.
After you make a decision, there may be hurt feelings on behalf of those who oppose the choice. Especially in situations in which team members stand to be adversely affected by the outcome of the decision, it’s vital to get these people to buy in and understand why the decision is beneficial in the long term. This helps you maintain a positive work environment.
Imagine that your business decides to change the pay structure for your sales team to one that reduces the base salary and emphasizes commission. Certain salespeople might receive lower paycheques once the new structure starts. However, you can get these employees to buy in by explaining how they can exceed their previous salary with commissions by reaching a certain sales volume and by stressing your commitment to providing the training they need to get to that level.
Making decisions becomes easier when you know what to avoid and use decision-making tools to help you. When it comes to financial decisions, having all of your data readily available in QuickBooks helps you make informed decisions easier. The QuickBooks Self-Employed app helps freelancers, contractors, and sole proprietors track and manage business on the go. Download the app now.