Making Better Decisions

How well businesses make decisions ultimately impacts their overall success.

Businesses that make bad or inconsistent decisions typically fail. Businesses which strive to make better decisions over time typically improve, while those which consistently “wing it” are flying blind. In the highly competitive world we all live in, businesses that make bad or inconsistent decisions typically fail.

Business owners who tend to “fly blind” usually repeat mistakes, operate below their full potential, and miss profitable opportunities.

For those business leaders who strive to make better choices over time, there are two different approaches, each with its merits.

1) Gut instinct. Gut instinct, or intuition, develops over a person’s lifetime and represents the sum total of all their prior experience in observing patterns of behavior over time. Depending on the types of decisions being made, studies have shown that gut instinct can better predict certain types of events than expensive computer models which consider lots of factual information.

This is especially true for decisions where there is no clear “data.” For example, a businessperson may have an uneasy feeling about choosing a new business partner or hiring a manager without knowing exactly why.

In my experience, it is important to adhere to that type of intuition. Chances are that your subconscious brain is recognizing “something wrong,” even if your logical brain has not yet had time to figure out what it is. Sometimes in those cases, putting off the decision (“sleeping on it”) gives the logical side of your brain a chance to catch up and figure out what is driving that concern.

Intuition can be improved over time. How? By working to better understand when your gut decisions were right (and wrong). Spend time reconciling the outcome to your original gut instinct. Was the success directly attributed to the original instinct? Example: I hired a manager who reminded me of a past manager who was a huge success. Was I right about this person? Did she have the same traits as the person she reminded me of?

Paying attention to the quality of your “gut” decisions over time can help you improve your intuition. On the other hand, merely acting on intuition (without working to improve it over time) risks seeing patterns where none exist. (Slot machine players who “get a feeling” about a hot streak usually go home a loser!)

Relying on gut instincts alone is self-limiting. Why? Because they are driven by previous experience. That makes them “blind” to other behavioral patterns which are equally true but have not been experienced. Similarly, if they don’t verify the quality of their gut decisions, they risk letting faulty assumptions lead them to making bad decisions because they mistakenly “feel good.”

2) Factual analysis. Beliefs and experiences can be immensely valuable. However, measuring and evaluating business performance can lead to new insights which fly in the face of “conventional wisdom.” For example, smaller businesses that don’t collect detailed sales data can understock or overstock items as a result of missing new trends that actual sales data would have identified.

When it comes to business performance, whether it’s sales mix, item profitability, employee productivity, etc., what gets measured gets done. Furthermore, the more an owner understands how each aspect of their business actually behaves, the easier it can be for them to recognize patterns and the sharper their intuition can become.

Making good decisions based on detailed data also requires a good measure of common sense. For example, several years ago, the real estate and banking industries collapsed in part because investors assumed (based on steady real estate appreciation) that the market could keep rising indefinitely, an assumption that today’s “common sense” would consider foolish. In our family, we were instead raised to believe that “If it seems too good to be true, it probably is!”

In my experience, making the best business decisions requires both “gut instinct” and analyzing data simultaneously. Time invested in “running the numbers” and looking for unexplained patterns pays off in helping uncover hidden patterns which can be leveraged to boost performance. On the other hand, consciously sharpening (and paying attention) to your gut instincts can help you avoid bad decisions which numbers alone cannot express.