Consider two choices you have likely faced in your life:
- “I’m going for coffee. Do you want one?”
- “You got the job offer. Will you take it?”
Both of these questions can be described as options in the financial sense: they provide you with the right to trade an underlying asset of a certain value before an expiry date. The coffee option expires very quickly and has a relatively small underlying value (depending on how tired you are at the time), and the cost of letting the option expire is also low. The underlying value, time til expiry, and option cost are all higher for the new job. While they both fit the same options model, they are two very different questions–conveniently your brain makes decisions using two very different “systems.” Just don’t pick the wrong system!
Read on for a practical guide to applying this options model do decisions you and your team face.
What is my option? Understand the value of the decision and the cost of letting it expire
When you or your team face a significant decision, start by clarifying the terms of the option:
- The underlying net value. If you accept this choice, what will you gain? what will it cost to get it? Are the costs and benefits one time or recurring items?
- The expiry date. Some choices feel urgent at first, but actually aren’t. Take a moment to clarify–either by thinking about it or explicitly asking the other party–when is the latest I can make this decision?
- The cost of letting the option expire. At first, this cost may appear to be the opposite of the underlying net value (#1 above). By examining your sunk costs to date and the incremental risks you’d incur by moving forward, the cost of letting the decision expire might be very small in comparison (for example, letting an offer expire without countering after completing a home inspection).
By understanding these parameters, you can see whether a quick, instinctive decision is required, or whether a slower, more deductive decision fits. Daniel Kahneman’s insightful and accessible book Thinking, Fast and Slow describes our two decision making systems and they best ways to employ them (The Financial Times ran a very clear review a few months ago). Kahneman also weaves an understanding of cognitive bias into his description of the two decision making systems.
Now that you have defined the option, considered which decision making system is engaged, and become aware of any cognitive bias at play, you’re able to make the best decision. Use the practical summary below to prompt your team to apply these concepts:
- Will more information help make the decision? More information can feed our pattern recognition and intuitive System 1. If so, enable your team to have the facts in hand.
- Will more consideration help provide more confidence about the decision? If the option allows, switch to a more deductive System 2 decision making process. David Allen suggests never making a decision in the same meeting that data is presented for the first time.
- How are biases clouding this decision? There is nothing inherently “bad” about biases, they just influence us in selecting an answer that isn’t appropriate for the situation in front of us. Build awareness of biases–laughing at them before changing can take the risk of guilt or judgment away.