Judgments - Lets Get Down to Brass Tacks

In Findings, John Tierney explores the human decision making process in the light of a new book titled "Predictably Irrational" by Dan Ariely. Tierney writes about a "leave behind your worst options" situation from ancient China:

"Xiang Yu was a Chinese general in the third century B.C. who took his troops across the Yangtze River into enemy territory and performed an experiment in decision making. He crushed his troops’ cooking pots and burned their ships.

He explained this was to focus them on moving forward — a motivational speech that was not appreciated by many of the soldiers watching their retreat option go up in flames. But General Xiang Yu would be vindicated, both on the battlefield and in the annals of social science research."

This approach to making decisive decisions can help some stuck business owners. If we think about how a CEO makes financial decisions, it's about eliminating options to get the right one. We can apply this approach to the not-so-clear non-financial decisions.

As described by Tierney, rational subjects at MIT prove that we as humans hold on to options longer than we should. Why? Because it is painful to let go of an option, a possibility. But there are very real costs to hanging on in terms of lost focus and poor performance.

How should a business owner apply this theory. In finance theory, a rational numeric judgment is used to eliminate options. When funds are available, managers perform a Return on Investment ("ROI") analysis to eliminate poor options and determine the best one.

Return on Investment looks at the pluses and minuses of various options in monetary terms. If you have several options, you consider the expected net cash return for each to find the highest expected return. If project 1 is to purchase a new lathe with an expected ROI of 18%, project 2 is to expand the building with an ROI of 14%, and project 3 is to do nothing or invest the money at 8%, then projects 2 and 3 should be eliminated for project 1, the action with the highest return, and eliminate the others.

What about other decisions that are not subject to ROI analysis? What's the cost of firing someone versus keeping them on for awhile? What is the cost of hiring someone now or waiting until markets turn? What is the real cost of visiting your best client once a quarter versus once a month?

Many of these actions cannot be reduced to a monetary return, but you can eliminate options. If you are considering 5 good candidates for a position, think about the most important considerations and see if you can eliminate 2 and continue with the best 3. If you have limited funds and 5 businesses to support, consider whether all are strategic, if not sell the outliers. An easy rule of thumb is that strategic judgments should be made sooner rather than later. A good book on successful decision makers can be found here.