Our first instincts on a hard decision, says investment manager and Columbia Business School professor Michael Mauboussin in this recent book, are often wrong. Rather than rely on ‘the power of intuition’, as some would assert, he says we would generally do better to ‘think twice’, that is, harness the power of our counter-intuition. Mauboussin offers a disciplined three step process for taking important decisions.
The first step, he argues, is preparation. This is about familiarizing yourself with the common mistakes others make in your field of decision-making. Becoming familiar with the errors of others means that we may be better avoid making the same mistakes ourselves – a commonsense notion that seems hard to argue with.
Second, we need to recognize these mistakes in context, that is, when we need to make our own decisions. It is one thing to understand, say, errors such as overconfidence, the ‘halo effect’, regression to the mean and status quo bias in general, but it is recognizing them in our particular decisions that leads to better decision-making.
Thirdly and most importantly, we need to apply the knowledge about the errors we are now familiar with. This, says the author, means we need to “build or refine a set of tools to cope with the realities of life, much as an athlete develops a repertoire of skills to prepare for a game”.
The author illustrates his thesis with numerous examples from business and sport (largely US examples, but still graspable in their essence). Much of the material will be familiar to those familiar with the basics of decision-making research and behavioural finance, but a feature of the book is the practical emphasis of the author (as a practicing funds manager he is well aware that important decisions almost always need to be made in conditions of considerable uncertainty. More pertinently for executives, he recognizes that decisions often create their own consequences, (a new product launch, for instance, will inevitably trigger competitive responses) so a decision is often the start not just the end of a process. A note of realism pervades the book – as the author notes, investment and/or company performance is often a result of both skill and luck, and discerning the relative amounts of each is no trivial task. This suggests humility, as well as the more typical mental virtues of prudence, foresight, flexibility and introspection, are all important for the successful decision maker.