Executive Summary
Making decisions is a fundamental part of life; in fact, it's almost daunting to consider how many decisions we actually make just to navigate our day-to-day lives, not to mention the weightier decisions that have to be made from time to time. Yet despite the crucial nature of making good decisions, most people have little if any framework or process around how decisions are made, except perhaps for creating basic lists of "pros" and "cons" that in practice often do little more than confirm the decision we already intended to make.
In the book "Decisive" noted authors Chip and Dan Heath take a deep dive into the research around decision-making, including both the shortcuts our brains typically take to make decisions (so that we are not rendered paralyzed by the volume of decisions to be made on a day-to-day basis) to the best practices in how to actually craft and effective decision-making process and when necessary avoid the shortcuts that may be helpful for routine decisions but can be destructive when misapplied in more important situations.
From the ideas of multitracking potential solutions to adopting a devil's advocate (or at least a culture that encourages them), what results is an excellent and inspirational book about how to change your own approach to making decisions, along with some ideas about how you might apply the concepts in your business and with your clients. As the authors clearly illustrate, even for those of us who pride ourselves on the depth of our analytical skills, the reality is that good process trumps good analysis - and notably, good process may lead to better analysis as well!
In "Decisive" by Chip and Dan Heath, the authors explore how it is that we make decisions, the ways we make mistakes in our decisions, and how to fix the issues based on the available research.
The essence of the problem is the fact that our brains routinely take shortcuts in the process of making decision. Of course, the reality is this is really a necessity of life; can you imagine how inordinately long it would take to get anything done in our daily lives if we engaged in an extensive decision-making process every time we had to make a choice, whether it's what to wear in the morning or what to eat for breakfast, not to mention the more substantive decisions in our day?
In fact, viewed from the opposite side, it's somewhat astonishing that the decision-making process isn't more paralyzing for us, given the sheerly daunting number of decisions we actually make throughout the day as we live our lives, most with relatively limited information; as Daniel Kahneman has noted, "A remarkable aspect of your mental life is that you are rarely stumped."
The Four Villains Of Decision-Making And How To Manage Them
So how does a decision get made? The basic approach is relatively straightforward: you encounter a choice, analyze the options, make a choice, and then live with it. Yet as the Heath brothers frame it, there are four core "villains" that cause this approach to be ineffective:
You encounter a choice. But narrow framing makes you miss options.
You analyze your options. But the confirmation bias leads you to gather self-serving information.
You make a choice. But short-term emotion will often tempt you to make the wrong one.
Then you live with it. But you'll often be overconfident about how the future will unfold.
So what's the solution to these cognitive biases and behavioral challenges we face? The Heath brothers frame four broad categories of solutions, to deal with each of the four challenges:
Widen your options when framing the problem (to avoid narrow framing that makes you miss options).
Reality-check your assumptions (to avoid confirmation bias)
Attain distance from your emotions to see the choices more clearly
Prepare to be wrong (to avoid overconfidence), because the future is uncertain
This "WRAP" framework - Widen frame, Reality-check, Attain distance, and Prepare to be wrong, forms the core of the book that follows, as the Heath brothers look in detail at strategies to implement in each category.
Multitracking And Other Better-Decision Techniques
One of the better-decision-making strategies that resonated the most with me was the concept of "multitracking" decisions. The basic idea is that rather than just looking at a proposal and trying to weigh its pros and cons (a venerated approach the Heath brothers note is rife with behavioral biases and other problems), the best approach is to actually test two different tracks of solutions simultaneously. For instance, graphic designers and advertising executives may work on several different design proposals simultaneously for the same project, as the feedback from the client about which is better than the other - and why - provides a far more effective feedback mechanism to arrive at the best solution (and also makes it easier to provide critical feedback without feeling personal). In another example, a firm chooses between two vendors on a long-term project by actually hiring them both for a short-term project, and then selecting whichever firm does the best as the long-term solution; while this approach may be more expensive and time-consuming initially, it results in much better decisions in the long run as the firm gets a much clearer perspective about what's really most important in a prospective solution when they truly spend time working with more than one and can compare and contrast them.
Another valuable decision-making process is to use the "devil's advocate" approach, which actually has a rich history - its origin is from the Catholic Church, which used a "devil's advocate" to make the case for why someone should not be named a saint, and was framed as the promoter fidei (the "promoter of the faith") as the role was designed to preserve the integrity of sainthood by ensuring that only those with overwhelming reasons to become saints should be allowed (notably, John Paul II eliminated the devil's advocate position in 1983 after 400 years, and since then saints have been canonized at a rate 20 times faster than the early part of the 20th century!). In a similar context, the authors suggest imagining if "due process" in a court was nothing more than a prosecutor presenting a series of PowerPoint slides with compelling charts about why the defendant is guilty, the judge then challenges some of those details (for which, of course, the prosecutor has already prepared responses), and then the accused person is sentenced. Having an attorney for the defense, to counterbalance the prosecutor, ensures a more balanced assessment of the situation, and ultimately allows the judge to be more objective and effective. Notably, the Heath brothers actually suggest that just appointing an official devil's advocate may not be best - as it can actually encourage everyone else to be less critical, delegating the responsibility to the devil's advocate. The point instead is to try to create an environment that recognizes the noble value of constructive criticism and debate of ideas.
Beyond these ideas, the book sets forth a whole host of other tips and strategies to improve the decision-making process, including: know when to trust your gut and when not (good if it's an area you've truly mastered, like a chess grand master evaluating the next move, but not such a good idea in most situations); help people frame opportunity costs ("should we buy this or not" is a narrow frame, but "should we buy this or spend the same $XX on something else" ensures we consider the other options); if you're having trouble making a decision, try taking away one option altogether and then follow the logic to see where you end out (sometimes you can't really see new alternatives until you force yourself to do so by eliminating some of the current choices). As is typical of most Heath brothers books, the concepts are explained well with stories and anecdotes that help to illustrate the key points.
Practical Implications For Financial Planners
While I'm generally a fan of all the Heath brothers books ("Switch" has been previously reviewed on this blog, and "Made To Stick" is excellent as well), I have to admit that I found "Decisive" to perhaps be the most practical and relevant of all the Heath brothers books I've read so far. As noted earlier, given the sheer number of decisions we face in our day-to-day world, there's clearly a lot of room for us to apply techniques that help us to make decisions more effectively, whether in the context of how we manage our own lives, run our businesses, or work with our clients on their decisions.
In fact, the book makes the point that one very effective means to attaining distance from your decisions (to avoid overly emotional decision making) is to gain an "outside view" of your problem - i.e., someone else's perspective - rather than your own inside view. Arguably, this in fact is one of the primary values of a financial planner in the first place - we help to provide that outside view for our clients to keep them from making overly emotional decisions regarding their goals and financial matters. This can be especially effective to help assess the core risks and likelihood of various outcomes of a decision, as the outside view - especially from an expert - can be especially effective at estimating the "base rate" likelihood that certain outcomes will occur.
Given the investment-centric focus of many financial advisory firms, it's notable that the insights of "Decisive" may be especially effective in the context of making good investment decisions, including - and perhaps especially - when trying to execute decisions as an investment committee. In particular, the book makes the point that creating a process that incorporates the "Decisive" principles is perhaps most important of all; for instance, in one broad study of business investment decisions, the research found that despite consistently rigorous analysis, the process mattered more than the analysis in the outcomes by a factor of six. In part, this was because the process ensured a good decision, but also because key aspects of a good process - like eliciting participation from a range of people who have different views of the decision, and including a wide range of perspectives - also ensured broader and more effective analysis as well. And of course, analysis in the absence of process doesn't work at all; as the authors note, "superb analysis is useless unless the decision process gives it a fair hearing."
To say the least, I'd definitely suggest that "Decisive" is a book worth reading and checking out. If you're curious, you can Chapter 1 is available directly from the Heath Brothers' website, to check it out before deciding to buy the book. Or just go ahead and buy it; while you may not have engaged in a comprehensive decision-making process first, I'm pretty sure you won't regret this decision.
[…] o livro é relevante para tudo, desde o modo pelo qual implementamos decisões de investimento (como já escrevi), até o entendimento do valor que um planejador financeiro agrega para clientes (uma visão […]