Wharton@Work

August 2021 | Leadership

The New Leadership: Decision Making Under Uncertainty

Great leaders are great decision makers. Faced with a daily barrage of decisions large and small, they know when to seek more information, when to consult with others, when to go with their gut, and even when to reframe the issue. As the pandemic made clear, though, when you’re faced with an unprecedented or otherwise highly uncertain situation, or you don’t have all the data you’d like and there’s virtually no chance you can get it, decisions can challenge even the most experienced and skillful leaders.

Maurice Schweitzer, Wharton professor of Operations, Information and Decisions and academic director of Effective Decision Making: Thinking Critically and Rationally, says there is a widespread lack of awareness about dealing with uncertainty. “Leaders constantly make decisions absent complete information, and often underappreciate how random and uncertain the world is. When you fail to account for uncertainty appropriately, you can make some serious errors.”

Potential Missteps

To begin with, we tend to be overconfident not only that good things will happen but also that we have a pretty good sense of what the best and worst case scenarios are. “Every decision is a forecast of the future,” says Schweitzer. “But we are surprised too often, because when we forecast the best and worst case scenarios, we invariably underestimate both how good and how bad things can become. The pandemic helped us realize just how stochastic the world really is. Everything from supply chains to travel plans to government intervention is hard to predict.”

Another potential error is failing to account for the higher degree of uncertainty inherent in complex situations. “When multiple players, components, and steps are involved, uncertainty rises,” says Schweitzer. Consider a construction project that requires the work of many subcontractors to go just right in order to finish on time. Projects with multiple steps are particularly prone to delays that we fail to anticipate.”

Schweitzer says failing to acknowledge uncertainty can also make it difficult to reach a decision. “Sometimes we have to figure out when to move forward and 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.”

Uncertainty can also lead us to reward the wrong things. “Leaders may reward good outcomes rather than good decisions, and punish bad outcomes rather than bad decisions. Many managers fail to distinguish between good and bad decisions because they are so focused on outcomes,” says Schweitzer.

Risk aversion is another challenge that emerges when dealing with uncertainty — and it can pose an even larger problem for organizations that reward good outcomes, rather than good decisions. 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 risk involved and your team could allocate its resources to a project with a smaller possible payoff, but a much greater chance of success. “Our brains are best suited for certain situations,” says Schweitzer. “We prefer to think in causal terms, and we like predictable outcomes. We want to open Door #1 when we know what’s behind it. When we don’t know, we undervalue potential outcomes.”

Risk also looks very different for the team and the organization as a whole. Schweitzer explains, “If you are the CEO, you want your teams taking risks that could reap huge rewards. At the organizational level, you will be more successful if many small teams are taking risks. And yet, if people are punished for failures, they will avoid big risks and exhibit risk aversion. This may be rational for each small team, but bad for the broader organization. If you want your teams to keep taking risks you have to reward the right decisions rather than merely rewarding positive outcomes.”

Schweitzer cites a classic example: a researcher asks her subject how much they value a $50 store gift card. The answer is typically slightly less than face value, and that holds true for a $100 gift card as well. But when the researcher says it’s a gamble — that they will flip a coin and the subject could get either the $50 or the $100 gift card — the value they place on the gamble is often less than the value they place on getting the $50 gift card alone (about $35), even though the gamble has to be worth more. “People are often very averse to uncertainty,” says Schweitzer. “Uncertainty causes us to severely discount possible outcomes. In organizations, that negativity can cause us to miss opportunities. People may walk away from a potential win rather than take a chance.”

Three Ways to Improve Your Process

High levels of uncertainty don’t mean we have to leave our decisions to chance. Over the four days of the Effective Decision Making program, participants learn tools and techniques to improve their process. The first is building an awareness of the potential problems described above. Understanding the role of overconfidence and risk aversion, for example, helps to sidestep their influence.

Second, use historical experience — but avoid another common mistake when evaluating what worked and what didn’t. Schweitzer says we often disproportionally attribute good outcomes to our own insights and skills while attributing bad outcomes to external circumstances.

Third, make a forecast that imagines a bad outcome, then figure out what contributed to it. “Called a premortem, it’s a way of helping us become the devil’s advocate and identify potential problems that we might have overlooked when we naturally expect a good outcome,” says Schweitzer.

Many of these challenges are surprisingly common. Does your organization reward outcomes or do managers take the time to reward a good process? How is risk taking rewarded? Ultimately, there is risk in every decision, but developing a greater awareness of the pitfalls and rewards from taking risks in a structured and deliberative process can lead to better outcomes.