Decision Making - Basics

Munger explained in a 1994 speech at University of Southern California What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ‘em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. You’ve got to have models in your head. And you’ve got to array your experience—both vicarious and direct—on this latticework of models.

I recently started wondering how successful people ( btw success is a relative term ) make decisions in their personal and professional life. The world’s greatest problem-solvers, forecasters, and decision-makers all rely on a set of frameworks and shortcuts that help them cut through complexity and separate good ideas from bad ones. You find them in dense textbooks on psychology, physics, economics, and more.

Frameworks helps to create a mental picture of a situation, which becomes a model which you can apply later in similar situation in future. CEOs to common man every one have learnings from the past. They see a pattern and create mental picture without naming them what they are. They don’t record this anywhere but they use it in their life.

Decision making becomes an important aspect of our life as we grow up yet I don’t have good framework to make our decisions. I want to see how people who found happiness and are at peace with what they have, had handy frameworks which they had as their toolkit.

Self-Reflection for Clarity

Few things successful people often did is to self-reflect. Their day may or may not have turned as they expect but end of the day they collected their thoughts to see their details and have a hard look on themselves.

• It improves self-awareness
• Keeps you focused on big picture
• Allows you make thought out decisions with a better perspective
• It helps to structure our thoughts

Problem Solving

Once you have the clarity in your thoughts, you move on to solving the problem at hand better. A good problem solver has these traits

• Being Curious
• Being Analytical
• Creativity
• Having courage
• Sense of commitment to purpose
• Adventurous
• Singular Objective
• Patience

A good problem solver should always expect the unexpected. He keeps looking for data to back his ideas and confirm his assumptions. Problems do come with a time limit on them. Problem cannot exist more than a prescribed time, which may set by your boss or board of directors or a simple e-mail from a furious customer or a personal emergency. To act quick we might need to make number of decisions in short span of time.

Expanding on Effective Decision needs a sense of calmness.

Many would have faced this stressful situations number of times. Once in my career, I was technically leading a team of amazing developers. It was a regular evening I was wrapping up my day’s work, about to leave for the day. One of my junior load testing guy came saying he ran a load test against a production environment by mistake. (For readers who are not aware of Load test, it is something which simulates like thousands of users log in to a system and see if our application can handle the load. This is a common thing you find in IT projects) It created lot of junk data which by any standards is atrocious. He ran for few seconds but thats enough damage done. Took this news to my director, within few seconds he said fix it, will deal the noise later. Quick span of decision at that level is hard, though this decision looked simple. Lot would have gone in his mind. He had a good framework he explained me later, which is to stay calm and focus on the problem at hand. Everything else can wait . We fixed the issue and days followed were long with explanations, plan of action to stop these accidents from happening in future. Since no data were corrupted, this went with no fallings. But this entire episode was a learning and proved his problem solving skills like singular objective, courage to move forward with patience. No burst of anger or more calls. Quick judgement was prudent and this stuck with me.

Preferences

How you go on to solve a problem says a lot about how you make your decision. Since decision-making sometimes involves working with people. Understanding how people prefer to solve a problem, helps us to quickly navigate personalities and solve the problem at hand. Gerard Puccio developed an assessment called “FourSight”. This segregates people based on their preferences while solving problem.

• People who prefer CLARITY
  • People who care for details. They dive deep and ask lots of questions.
• People who prefer to IDEATE
  • Big picture guys, who tend use their intuition and less concerned with details. They come up with many solutions instead of one.
• People who prefer to DEVELOP
  • They spend analyzing potential solutions. They create plan of action. They are perfectionists.
• Lastly people who prefer to IMPLEMENT
  • Implementers get frustrated by “thinking” when they could be “doing”. They like to get going.

People are mix of these types. You might prefer to CLARIFY AND IMPLEMENT. Few others would like to DEVELOP but not to IMPLEMENT. Understanding this about yourself and others helps us drive closer to solving a problem

Cognitive Bias

“Personally, I’ve gotten so that I now use a two-track analysis. First, what are the factors that govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things – which are useful but malfunction?

One approach is rationality-the way you’d work out a bridge problem: by evaluating the interests, the probabilities etc. And the other is to evaluate the psychological factors that cause subconscious conclusions-many of which are wrong."- Charlie Munger

One of the skills of problem solving is being curious. Our brains fill gaps in our knowledge. It’s quiet and subtle. This leads to what is called Dunning-Kruger Effect. Recognizing this is an important for us to take a decision. To avoid this loophole, skill we need to develop which experts call as Scientific Thinking , a deliberate process of learning and engaging with reality. While making a decision, a scientific mind should always remain inquisitive and skeptic about the data we have in hand. Be skeptic about ideologies, compelling points and more than anything your intuition. Scientific thinking should lead us to a rational and evidence based world.

Biases

We now know logical approach is best way to tackle a problem but then there are biases which might affect our decision making. Being aware of them helps you understand the situation better and act accordingly. Biases might affect our thinking, judgement and decisions we make everyday. Back in 70s, two friends (Amos Tversky and Daniel Kahneman) have changed how we think about how we think and the book Undoing Project talks about this. They introduced the cognitive biases to us.

12 Biases in play

• FOMO - Fear of Missing out
  • Missing out on new experiences, parties, investment etc.
  • This Anxiety can lead you to emotional decision, which we know is not good. Scientific Thinking should lead you to logic based decision. Based on facts and not on fear
  • Read more here
• Curse of Knowledge
  • Assuming Things. Like assuming other person possess knowledge on particular topic.
  • This Bias can confuse you or create fear within you or make you doubt others if anything goes wrong
  • Hanson’s Razor Mental Model will help on this bias. Which we will see in next section
  • Read more here
• Pessimism Bias
  • Having pessimistic outlook on things you are good at
  • This will limit your potential and stop you from progress
  • Read more on this here
• Confirmation Bias
  • You look for information that supports your belief.
  • This affects our judgement or makes you to make bad decision
  • Read more on this here
• Fundamental Attribution Error
  • Known as Correspondence Bias
  • Not Factoring in the situational advantage other person might or might not have.
  • We tend to judge a person based on a single action. Assuming If a person is kind to one person in a particular instance is always kind to others.
  • Read more here and here
• Social Proof
  • Herd Mentality where you copy others action.
  • Thinking if we emulate successful person’s action will lead you to success
  • This will lead others to take advantage of you to persuade or influence you to take certain action which you might not have by yourself.
  • It is always think for yourself. You can read more and this short video. This Bias affects how websites are designed today

“If you care about what people think about you, you will end up being their slave. Reject and pull your own rope.” ― Auliq Ice

• Anchoring

  • You depend exclusively more on the initial information you got and make more judgements / decisions based on this.
  • Stops you from considering all the information you receive as you progress and makes you to jump to conclusion
  • Read on this here and more here

• Hindsight Bias

  • Over estimating one’s ability to predict the outcome
  • Brings over confidence and impairs your judgement
  • If you had success in your prediction, don’t change the odds as probability has not changed
  • Read more on this here

• Dunning-Kruger Effect

  • Incompetent people are not able to recognize their own incompetence
  • This affects what you believe and its impact on the decision making
  • Combating the tendency to assume, being committed to learning and open mindedness is the antidote for overcoming this bias
  • More on this and this news article

• Self-Serving Bias

  • Person taking credit for positive events and blaming others for negative events
  • This affects the relationships. No long-term relationships are possible
  • There is lack of trust on people who exhibit this bias
  • Observing one self of this bias and Self-Compassion is the antidote for this
  • Read on this and this

• Barnum Effect

  • Known as Forer Effect
  • People tend to believe General sweeping statements are about themselves
  • All the recommendation systems and personalizations are based out of the mass pattern which are labeled with your name.
  • Our inability to see through General and Personalized feedback can lead to bad decisions
  • Barnum Effect when applied appropriately can help strength relationship and in business customers feel personalized
  • More on Barnum Affecting Decisions and in general approach

• Halo Effect

  • Error in reasoning based on first impression or a single trait or limited information
  • Relying on experience and knowledge bring about this effect
  • This may manipulate us or trick us into making a decision with limited information without rational thinking and logic
  • Recognizing this bias, helps you to slow down your thinking without judging others based on a single fact or analyzing the problem at hand with initial data
  • Recognizing this effect will lead you to make more informed decisions
  • Read on this and Recommended Book on this

Recognizing these biases within us in every situation can lead to better understand one’s self and the world. This has been observed by successful people and they have developed frameworks or mental models to overcome this bias and make effective decisions

Mental Models

Better models means better thinking. Connecting with reality is essential for better decision making. Successful people know how important is this and stay grounded by connecting themselves with reality. Models are simplifications as they leave details out. Models allow to create dialogue between data and ideas. Using models, make you a better thinker, leads to deeper coherent understanding of this world. Models are framework, not a solution in itself. When it comes to Mental Models, there is not one that fits the bill, models interact with each other, more you have in the pocket the better the decision making effectiveness.

“The chief enemy of good decisions is a lack of sufficient perspectives on a problem.” - Alain de Botton

Quick Jot downs

Few Mental Models I tried to collect from various sources and use as references. Every model deserves its own blog post, but there are many out there for you to refer. This is an effort to put them in one place for reference

• Circle of Competence

  • Idea is to stick to what you are an expert.
  • It’s not important how big is the circle, but what is important is to know the boundaries
  • Created by Warren Buffett and Charlie Munger for their investing principles.
  • 

• First Principles Thinking

  • Idea is to break down complex problems into basic elements and then reassemble from ground up. Elon Musk is a big proponent of this model
  • It abolishes Authority. Much of what we believe is based on an authority figure telling us that something is true.
  • Read more on this topic here and here

• Thought Experiment

  • Technique to think broadly about future scenarios.
  • Read more on Schrodinger’s Cat Paradox
  • Recommended Book more on this topic - In Search Of Schrodinger’s Cat

• Second-Order Thinking

  • You ask then What?
  • First Order thinking is easy and quick.Everyone can do that. But second order is deliberate.
  • It is deep and convoluted.
  • Odd of success increases with more deeper you go and look for consequences of the action / decision
  • It tries to consider the long-term consequence of your action
  • Applying Second Order thinking in Finance
  • You can read more on this here and here

• Probabilistic Thinking

  • Idea is estimate using math and logic, the likelihood of any specific outcome to occur
  • In the World we know, there is no simple Yes-or-No decision
  • Uncertainty is there due to lot of factors in play. Figuring out the probable outcome, we can have decision to be more effective and precise
  • Read more on this and more detailed paper on this

• Inversion

  • Idea is to avoid stupidity instead of trying to be brilliant
  • Carl Gustav Jacob Jacobi a german mathematician you said invert, always invert.
  • Instead of asking how to solve the problem, you ask what will stop me solving this problem and consider solutions that will support the question.
  • Instead of asking how to read more books, invert the question and ask “what stopping me from reading more books ?” and start working on eliminating the things that stopping you from reading books.
  • It is against the natural thinking. You start to think backwards.

• Occam’s Razor

  • Another name " law of parsimony"
  • Idea is based on “simplest explanation is likely the right one”
  • Always look for simplest solutions and thereby eliminating the complex ones
  • Complex solutions are distractions. They bring about more scenarios that are not testable and bound for failure.
  • Instead focusing on what works in the given situation.
  • Apply when quick decisions have to be made with less data in hand.
  • Make sure you don’t prey for confirmation Bias when using this model
  • One other way to think about this model is, when you have two competing theories that make exactly the same predictions, the simpler one is the better.
  • Read more here and more here

• Hanlon’s Razor

  “Never ascribe to malice that which is adequately explained by incompetence.” - Napolean

  Misunderstandings and neglect create more confusion in this world than trickery and malice. At any rate, the last two are much less frequent. - Goethe

  • Idea is to give benefit of doubt. When something goes wrong, we assume everyone and everything is working against us.
  • This model avoid assuming things. Things go wrong due to Inability or neglect
  • Model helps you to have a great relationships personally and professionally.
  • While decision making, this model helps you not to take things personally. Helps you maintain calmness. Tense nature creeps up due to the fact either we take things personally or assume other person did this intentionally or blaming situations for the problems.
  • Again as with any models, over relying on this can create blind spot for true malice. You need to consider the context and historical evidence while applying this model

Models are good to be known by name but it is a waste of head space if you can’t apply in an immediate context and practice them. This entire blog post made me learn a lot and hope you did learn a bit. Every model deserves a blog post, this is a small attempt to bring the names together in one place for me to refer.

Even the best decision doesn’t yield the best outcome every time. There’s always an element of luck that you can’t control, and there is always information that is hidden from view. So the key to long-term success (and avoiding worrying yourself to death) is to think in bets: How sure am I? What are the possible ways things could turn out? What decision has the highest odds of success? Did I land in the unlucky 10% on the strategy that works 90% of the time? Or is my success attributable to dumb luck rather than great decision making? from Thinking in Bets

So I end this with a thought I liked a lot.

References and further reading

• Mental Model for Designers from Dropbox Team
• Probabilistic Thinking - Princeton University
• Book: Super Thinking
• Great Mental Models Vol-1
• Principles
• Untools
• Book: Thinking fast and slow
• Algorithms for Decision Making

Subscribe To My Weekly Newsletter