August 2017 | Strategy
Great leaders are great decision makers. Faced with a daily barrage of decisions large and small, they know how to resolve them: when to go with their gut, when to consult with others, when to wait, and even when to reframe the issue. Increasingly, it also means navigating under uncertainty. When you don’t have all the data you’d like, and there’s virtually no chance you can get it, what do you do? It’s a key question that’s asked and answered in Wharton’s The Strategic Decision-Making Mindset.
Maurice Schweitzer, Wharton professor of operations, information, and decisions, and academic director of the program, says there is a widespread lack of awareness about dealing with uncertainty. “Leaders must constantly make decisions absent complete information, and often they don’t appreciate how random and uncertain the world is. When you don’t take that important reality into account, you can make some serious errors.”
To begin with, Schweitzer, co-author of Friend & Foe: When to Cooperate, When to Compete, and How to Succeed at Both, says failing to acknowledge uncertainty can lead to rewarding the wrong things. “Leaders may reward good outcomes rather than good decisions, and punish bad outcomes rather than bad decisions. You might not even be able to tell the difference between good and bad decisions because you’re only focused on outcomes.”
It can also make it difficult to assess the value of time with respect to your decision, he says. “Sometimes we have to figure out when to stop collecting information. We want to make the best-informed decision, but there’s a tradeoff for waiting. It’s the opposite of the rush-to-solve bias. You need to determine what key information you have, what you can get, and what you can’t. Don’t wait longer than you have to before making the decision.”
Risk aversion is another problem that surfaces when dealing with uncertainty. Say your team has the chance to work on a potentially ground-breaking innovation — one that could set your company up for a win that would take years for your competitors to catch up to. But there is some risk involved. The safer bet is to choose to apply your resources to a sure thing that will make a small return on investment.
Most people will choose the latter, even if the risk of the former is relatively small. “Our brains are best suited for more certain situations,” says Schweitzer. “We prefer direct causality, and predictable outcomes. We want to open Door #1 when we know what’s behind it. When we don’t know, we tend to undervalue things quite severely.”
He cites a classic example: a researcher asks her subject how much he values a $50 store gift card; the answer is typically slightly less than face value. That holds true for a $100 card as well. But when the researcher says it’s a gamble — that the subject could get either of the two cards — the value drops to about $35, even though he knows both cards are worth more. “People react negatively to gambles,” says Schweitzer. “Uncertainty makes us drag out decisions and severely discount possible outcomes. In organizations, that negativity can cause us to miss opportunities. People would often rather walk away from a potential win than take a chance.”
Think about that in terms of your team. What risks feel familiar and tend to get taken when they shouldn’t? Conversely, what risks might you be taking too seriously, preventing you from a potential upside because you choose to avoid the opportunity altogether? Ultimately, there is some risk in every decision, but understanding how we commonly react to them, and adjusting our decisions accordingly, can lead to better outcomes.
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