The Evidence-Based Guide to Important Factors To Consider in Decision Making

Van Halen was once the most famous bands in the world. They released hit after hit. But rumors spread that the members were divas.

They would demand ridiculous services like a bowl of M&M’s with no brown ones in it prepared on a table before a show. If they found one brown M&M, they would flip out and trash the entire room.

But the truth about Van Halen is that they were not spoiled. They project management geniuses.

The lead singer, David Lee Roth, was one of the best show organizers in the world. The M&M demand was a small test to see if the production staff was up to par. If they did not read every detail in the contract and directions, it was guaranteed that technical errors would occur during the show that would ruin the whole thing.

In fact, I don’t blame them for flipping out. The line about M&M’s in the contract actually clearly states that they would forfeit the entire show with full compensation if there were brown M&M’s.

Setting up these systems like Van Halen can really impact your decision-making process. And we all know how important good decisions are towards your success in life.

So how do you effectively make the right decision? I learned this incredible Van Halen story and other amazing decision-making tips from the book Decisive: How to Make Better Choices in Life and Work and my own research. I want to share what I learned with you today:

Contents

We make horrible decisions, look at these stats…

Did you know that most CEO’s suck at decision making?

A KPM study of hundreds of mergers and acquisitions found that over 83% never created any additional shareholder value. Next time, you’re considering buying a company and all the data points add up, don’t. You are most likely wrong.

Investing and acquiring businesses are a different skill from building and growing a business. Richard Branson admitted this in his book Business Stripped Bare, when he found that a lot of his investing ventures did not pan out.

Avoid the 4 Horsemen of The Bad-Decision Apocalypse

The book says there are 4 big factors that influence you into making bad decisions:

1. Beware of Overconfidence In Your Predictions of the Future

Be careful of being overconfident in your predictions of the future.

We often overestimate what we are capable of, especially in the short-term.

How to counteract this:

a) Add Extra Time To Your Estimate

Add extra time in your estimates. Top engineers often add 30% to their estimated completion time and even more for tougher tasks to counterbalance their overconfidence.

b) Distance Yourself From the Problem. Clarity Comes From Distance.

Ever hear someone ask for dating advice when the answer was so obvious?

“I have a overweight loser boyfriend who beats me. What do I do?” I don’t know.. Maybe leave him!?

Sometimes, the right decision is not clear because you are involved. Try distancing yourself from the problem to see it clearer. Ask yourself what advice you would give a friend, predecessor, relative with the same problem.

When students were asked between choosing a job they didn’t like that paid well versus a job that paid modestly that fulfilled their passions and let them grow, they were split 50/50 on the decision. But when they were told a friend asked them the say thing, 83% said to take the second choice.

When you distance yourself from the problem by imagining it being done for someone else (your sibling or your predecessor), your choice could be a lot clearer.

Imagining what your predecessor would do after you left has been a great way for CEO’s to distance themselves and make better long-term business decisions.

2. Beware of Believing You Have Less Options Than You Do

Humans often falsely assume we only two options:

I can get this job I hate or stay poor.
I can get rich or I can be happy.
I can be fit or I can be happy.
I can say no and piss him off or say yes and piss myself off.

The list goes on. This unnecessarily limits the options we have to choose from.

Instead, use the “And instead of Or” technique. It’s self-explanatory. See if you can get both things rather than just one.

Here is an example of this technique at play:

Instead of assuming you have to take a job you hate for the rest of your life, see if you can take it for the time being and work on growing a side business or side job you like on the side.

Phil Nut studied high impact decisions in everything from hospitals to businesses for 30 years. He found that only 29% considered at least one other decision. He found that those who did failed 32% of the time while those who didn’t failed 52% of the time.

You are often put in a business environment where you are too focused on convincing an exec to say Yes rather than considering other options. Change the environment and monitor situations to avoid this “Whether or Not” decision situation.

How to combat this:

Realize that there’s a whole spectrum of options that you aren’t choosing from. Think creatively on what else you can do.
Set up reminders that trigger when you make a decision without considering all other choices. Studies show that just getting people to way other opportunities significantly improves chances of making the right decision.
Be aware of “Whether or Not” decisions. If you are deciding “yes/no” or “either/or”, you probably aren’t considering all your options. Consider if you can have “both” or do something else.
Use the “Vanishing Options” test: If you couldn’t choose any of the choices offered, what other option could you come up with?

3. Beware of Confirmation Bias

Studies show that when humans are given equal amounts of data that confirm and disprove their theory, they are much more likely to only bring up the data that confirms their theory to others.

This is confirmation bias at play: the tendency to search, favor, and recall only confirming evidence disproportionately.

The billionaire Charlie Munger attempts to negate this by only asserting a point if he can also argue to disprove that point better than anyone in the world.

Confirmation bias is a huge problem in business. I’ll give you an analogy to explain why.

Pretend there is a criminal case going on in court. The judge only hears one side of the arguments and story. Then, he decides on his decision. This is exactly what occurs in business:

There’s usually only one team that has spent all their time to prepare a presentation arguing one side of a decision. The judge is usually the CEO or another top executive. He never spends much time considering the other side to an issue and therefore ends up promptly agreeing based on one that on side.

Gatorade was one of a successful acquisition of a beverage company. It was very profitable. The CEO of Quaker who made that decision went on to acquire Snapple. It turned out the be the worst mistake of his life. It made him resign.

It turns out that the tea and juice industry are completely different from other beverage industries in manufacturing, production, and other parts. Snapple was later sold off for a 1/6th of the price bought.

The issue with most companies is that the top executive isn’t facing a Yes/No decision. They’re facing a Yes/Yes decision. They’re only surrounded with Yes Men who give one side of the case. There is no team that is there to argue the “No” side to the decision.

4. Beware of Short-Term Emotions

Humans aren’t cautious with their decisions. Oftentimes, they’re incredibly overconfident in the wrong decision.

An example would be the executives of Intel. They were so confident that getting rid of their flagship product would destroy their R&D department and salesforce’s success. It ended up making Intel so much money that a $1 invested in its stock would have grown to over $30,000 (as compared to only $7000 from the S&P 500).

In addition to these 4 factors in decision making, the book gives a lot of other useful tips to make better life decisions:

Avoid Favoritism

One of many biases that affect our decisions is favoritism. We might choose to make the wrong move because we really like one of our employees. What they’re telling us might be wrong, but we still agree with them because they have gained our favor over the years.

Don’t have too many choices

A study by Sheena Lyengar reveals that too many choices stops people from making a decision.

They set out a stand with 6 sample jam choices and tested that against 24 choices. The latter was more popular, but resulted in fewer actual purchases.

Specifically, 30 percent bought compared to 3 percent.

See videos below for more detail:

The book Paradox of Choice goes into more detail on this. Having more choices can make you feel worse about your decision afterwards.

But as a quick note: based on studies, your decision-making generally gets declines around 6 to 20 choices.

Also, a 2010 study found that it may be more complicated. It could be related to information overload rather than too many choices.

People are just as likely to buy and prefer more choices if they know the product well. An example would be Starbucks coffee.

Avoid Ego

Ego, arrogance, and hubris all mean when you think you are more capable than you actually are.

What’s the danger of this?

It could potentially mean losing hundreds of millions of dollars for a business. A study was done that showed a correlation between the amount of times the CEO was mentioned in media and how much extra he paid for a company acquisition.

Historical studies have shown that up to 90% of acquisitions fail. It’s like a finding a needle in a hay stack;it’s not worth the risk. But CEO’s get overconfident in their ability, let their team of Yes-men butter them up further, and make a foolish decision.

A study was done comparing processes for giving feedback. Designers were given constructive feedback on the ads they designed.

The difference was in how they were given feedback. One group was given feedback on multiple ads simultaneously while the other group was given feedback one ad at a time.

The simultaneous group’s ads performed a lot better; they got higher CTR and better response from ad experts. Why?

Because when you are given feedback one ad at a time, you attach your ego to your work. When you are critiqued on many different ads, you don’t attach your own self-worth and ego to the ad. Therefore, you are more able to take criticism.

How to prevent this:

Set up an environment where it’s clear that critiques on you aren’t an attack on your personal worth.
Studies show it is almost impossible to remove ego or arrogance yourself. Instead, have people around you who will disagree and argue the other side. Have a designated devil’s advocate team or partner.

Assess the Choices as an objective team to avoid arguments and allegiances

Another issue you may run into is splitting your team into sides when an argument comes up around which decision to make.

In the book, they gave the example of a big copper company that had this exact issue when they had to decide between some last resorts to try and stay alive or shut down and put tens of thousands out of work.

The board split into different sides because they sided with different decisions. The issue was resolved when the question was turned around to look at each decision one by one and ask “What would have to be true for this to be the best decision?” It stopped the fighting and merged everyone back to the same collaborative team to tackle each issue.

If you are struggling with fights between your team, ask them if we can all look at one decision one at a time and ask “What are all the factors that have to be true for this to be the best decision?”

Look for common themes in your successful decisions

Are there any overlooked common themes in your successful decisions that you can add into your decision-making routine? The book calls these “Bright Spots.”

For example, you might find that you always work out after you eat lunch. You could set your schedule to add a gym routine right after lunch to make it a habit.

Kaiser Permanente is a successful 10,000+ employee health care company. They saved thousands of lives every year by identifying a disease that was causing as much death as cancer but was a bit easier to detect and prevent with systems.

Realize What State You Are in Before You Make A Decision

There are two states the book says you should avoid: the “prevention state” and the “promotion state.” These states are often brought on by your life experiences before.

So if you had a really bad day because of people you treating you badly and horrible traffic, you might be in the prevention state. And you’re less likely to say Yes to decisions from your employees.

I read one of Donald Trump’s books and he had this happen to him. He had a superstar employee he would have given a raise to in a heartbeat… except this employee chose to ask for a raise at the worst time possible.

Donald was just getting out of a very frustrating call with someone that pissed him off. Of course, he did not get the raise.

I feel like this prevention state is deeply related to willpower. Studies have shown that judges say “yes” and decide someone is innocent less and less as the day progresses because their willpower is drained. They also found that men are more likely to cheat on their girlfriend or wife at the end of the day for the same reason.

Now, the promotion state is the opposite. You are more likely to say Yes when you are in this state. An example of an environment that would spur this state would be a company culture of over-optimism despite a ton of contrary evidence (if they would look for it).

Consider Short Term, Mid Term, and Long Term Consequences (The 10-10-10 Rule)

We often overemphasize the short-term and under emphasize the long term. Therefore, many people underestimate their 10 year accomplishments and over-predict what they can do in the next week, month, and year. Also, they often chase short-term pleasures (drugs, alcohol, partying, etc.) at the cost of long-term financial and career success.

The book suggests you use the 10-10-10 Rule. It basically asks you what the positive and negative consequences and potential of your decision will be in the next 10 days, 10 months, and 10 years. This forces you to consider more factors than you would have, including the long-term.

An example would be whether to ask a girl out. Most people over-emphasize the short-term. But when you consider what you’d think 10 years later, you’d realize that you could have missed out on your dream wife and you would have forgot about the rejection by then. All of a sudden, it doesn’t seem as bad.

Don’t Do Something Just Because Everyone Else Is (Peer Pressure and Social Proof)

Are you falling into the classic trap of “The Emperor Has No Clothes”? If you’re not familiar with the children’s story, here’s what happened:

Two tricksters came into a kingdom and convinced the emperor to buy “magic clothes that only those who were smart could see.” In reality, there was nothing there. Just air. Everyone including the emperor pretended that they saw the clothes so they didn’t want to be seen as dumb.

The tricksters took their money and ran. And eventually a child pointed out the obvious: “He’s naked!” and everyone realized how foolish they were.

The point is: don’t do things just because everyone else is doing and don’t do something that seems wrong just because you don’t want to embarrass yourself.

Another example is beer. A lot of people hate the taste of beer. So why does everyone drink it? The book argues that one reason is because they think everyone else loves the taste.

Therefore, at a party or social event, they don’t want to be left out. So everyone ends up drinking thinking he or she is the only one who hates beer when everyone does.

The point is that if you can learn how everyone else truly thinks about something, you may avoid being peer pressured into a decision by social proof.

Do Small Tests Before Jumping In Head First (“Ooching”)

Remember you were at a pool? Did you jump in head first or dip your toe in the water first?

The book calls the toe-dip “ooching.” Ooching is doing a small test first to prove a theory. This prevents you from large, bad consequences because the test is so small. It also lets you return to the normal way of doing things if it doesn’t work.

Ooching is important because you sometimes don’t know what’s the right decision. Studies have shown that most “experts” from many jobs (psychologists, economists, political predictors, etc.) are wrong in their predictions. Therefore, you can’t always trust their advice.

Also, this is what successful entrepreneurs do so it’s important to make sure to you do it as well. Successful CEO’s go out, test, learn, change their test, and keep improving. They don’t spend too long planning or analyzing before they make their decision.

Sometimes when you test, you find results that were completely unexpected that move you forward. All the predicting beforehand could be made useless.

The High Calling wrote about using ooching to test out different ways of dealing with social media haters. By testing, they found that addressing one hater every week worked better than ignoring them all.

Ooching works great for finding your passion, parenting, or dating.

You can try out different jobs by interning.
You can try out your child’s way of doing things rather than always dismissing it.
different people you want to marry with a small date.

The power of small tests is that it sometimes disproves what you assumed is fact.

For example, a parent could always assume his way of doing things is best. You could assume that your child should always be fully dressed before eating breakfast. But when you test out letting your child eat in PJ’s and getting dressed later, you could be surprised to find that it’s more efficient.

You may think it’s common sense but it’s not.

Every year, thousands of people go to medical or law school without ever trying out the profession before hand. They could spend years learning about a job that they realize they don’t want.

Ooching doesn’t work well for decisions that require commitment.

You can’t ooch when you have already married someone.
You can’t ooch as an emotional crutch just to keep procrastinating from getting a real job.

To Learn How To Get To A Future Goal, Walk Backwards From It As If It Already Happened

Instead of guessing or wondering what is needed to get to a future goal, imagine if the goal already happened and ask yourself, “What needs to have taken place for this to have already been achieved?”

This makes things more concrete and firm since you are imagining it already happened.

An example would be, “It is the year 2025 and we have our first Asian American president. Therefore, here is what has had to happen for this to occur…”

These can be applied to your personal goals like losing weight or making more money too.

Be Careful of Reference Points and Percentages

I couldn’t help to resist by adding my own advice for making better decisions.

Compare to situations and tell me in which you would actually buy:

You see a grill on sale at a store. Original price: $400, Current price: $300.

Versus:

You see a grill on sale at a store: Original price: $500, Current price: $350.

Conclusion and Book Review

This book Decisive goes into some good detail on some of the devils of decision making, but not all of them.

I still think it’s well worth the read because most people don’t even know about a single one of these cognitive biases. Once you’ve accounted for all of these, I suggest reading Influence: The Psychology of Persuasion for a deeper level of understanding to the psychology that affects us to protect yourself.

If you want to cover all the bases to bad decision making, this book alone will not do it. There are dozens of psychological biases that also affect us that are not mentioned in this book.

Having said that, it touches some of the big pillars of bad decision making in-depth:

Overconfidence in predicting the future.
Narrow Framework of options.
Confirmation Bias.
Short-term emotions.

If you want to make better decisions, I highly recommend this book. I was shocked at the mistakes made by huge CEO’s of well-known companies out of ego and confirmation bias. The book goes into a lot more detail into the stories, scientific research, and stats then I have covered here.

Plus, the cover of the print book comes with a cool holographic image.

Click here to buy the book or learn more details about the book. I will get a small commission if you go through that link.

Now, I want to hear from you.

Were there decisions in the past that you wish you had applied these steps to before? What will you do in the future to protect yourself from bad decisions?