Monday, August 31, 2009

The Fine Art of Making Bad Decisions

Butch Cassidy and the Sundance Kid are trapped on the edge of the cliff. “What I look at it, we can either fight or give. If we give, we go to jail. If we fight, they can go for position and shoot us, wait and starve us out, maybe start a rock slide and get us that way. What else can they do?”

“They could surrender to us, but I wouldn’t count on it,” replied the Kid.

Butch thinks for a minute. “Wait! We’ll jump!” It’s 300 feet down into rock-filled, treacherous waters. And after some argument ("I can't swim!"), both men eventually jump.

What kind of idiot makes a blind jump into uncharted waters? Answer: the one who’s otherwise dead anyway.

Making good decisions is easy. A good decision implies the existence of a good alternative, and anybody can do that. If there is a good choice, problem solved. But what if all your alternatives are rotten? Well, in most organizations, that gets kicked up the ladder. The higher you are, the nastier the choices that end up on your plate.

Actually, Butch and Sundance had a pretty easy choice: the certainty of death if they stayed, the probability of death if they jumped. Not a pleasant decision, but not a hard one. Real leaders have it worse. They have to choose among strategies each of which makes sense given a specific future. But the future is like Schrödinger’s Cat: depending on the actions of unknown random variables, the cat is both alive and dead until the moment the box is opened. The future become real only when it becomes the present.

Risk managers distinguish between the concepts of “pure risk” and “business risk.” Pure risk only contains a downside. If you didn’t get into a car accident yesterday, you’re not better off. You just failed to become worse off. If pure risk is avoided, it’s status quo. Business risk, on the other hand, combines threat and opportunity in the same decision. If you launch a new product, you might make a lot of money. If it doesn’t succeed, you’ll lose a bundle.

There are four parts of the business risk equation: the probability of the downside, the effect of the downside if it should happen, the probability of the upside, and the effect of the upside if it happens. In classical risk, you know the probability and the impact, so calculating the expected value of the decision is fairly straightforward.

What do you do when you don’t have the numbers? Try asking these four questions when evaluating potential bad choices:

1. What’s the best that can happen? (Can I make it better?)

2. What’s the worst that can happen? (Can I mitigate the impact?)

3. Is #1 worth risking #2? (Is the probability of one higher than the other? Is the impact of one higher than the other? Am I looking at an absence of good options?)

4. Can I live with #2 if it happens? (If not, do I have a less bad option available?)

The buck has to stop somewhere, and the available options may not be what anyone would prefer. Making bad choices is one of the unavoidable burdens of leadership. Do it as well as you can. That's what SideWise thinkers do.

1 comment:

  1. Great piece, Michael! What is that bit about the wisdom to make good decisions coming from experience, from making bad decisions? Rather a new light on that old joke. Thanks!