Compared to What?

Life is about making choices, and those choices have consequences. In business, leaders are constantly making choices: which projects to prioritize, which candidates to hire, which vendors to select, which targets to acquire, which virtual background to use in the next video conference.

If business is a test, many leaders under pressure often treat these decisions as true-false questions rather than multiple choice. They look at each potential solution as soon as it’s visible, and decide “yes or no:” if yes, stop looking for alternatives; if no, move on to the next yes-no decision.

Another approach is to collect potential solutions and evaluate them as a set. What are the comparative strengths of each? How could the leader construct a hybrid solution by combining the best components into a single solution? Can one long-shot solution become negotiating leverage against the incumbent? And finally, have you evaluated your potential actions against the alternative of “do nothing” ?

Maybe take a little longer to understand the alternatives?

But don’t dawdle: according to some research on optimal decision making, collecting too much information before making a decision can be worse than making a snap judgement using intuition alone.

Once a decision has been made, is a leader willing to change course if the results don’t come through as expected? A common bias is the sunk cost fallacy – the cause of “throwing good money after bad.” After making a decision, re-assess the path you are on versus the alternatives that are still available. Net of additional switching costs, can what you have learned since the initial decision lead to a better outcome with an alternative solution?

Leaders face a barrage of decisions each day. My intent is that the techniques outlined above help you achieve better outcomes from at least a few of those decisions. Please use the comments to provide your feedback and questions.


Do you lead like a chess player or a poker player?

Legends spanning history from Marcus Aurelius to Bill Gates to Scott Adams have acknowledged the role of luck in achieving success. Despite this humble and public affirmation of chance’s important role in business success, the social connotations of “games of chance” (better known as gambling) are resoundingly negative.

Ashok asks how much is luck: Dilbert by Scott Adams

Answer quickly, chess or poker: which game has more prestige? Which game has an extra-curricular club with its picture in the high school yearbook? Which game gets played late into the night on boozy weekends with college buddies?

While I’ve never had the patience to improve my skills at either chess or poker, I grappled with this apparent societal contradiction for decades until a recent interview with Annie Duke, author of Thinking in Bets and other brilliant books, brought it all into focus for me.

I’m now convinced that teaching my daughters how to play chess instead of poker would be a major Dad Fail.

The key idea that brought it into focus for me is what Annie Duke calls “resulting.” Learning occurs when we reflect on the outcome of a choice we made, to inform our future choices. As Ray Dalio puts it, “pain plus reflection equals progress.” Daniel Kahneman, and others, explored how biology and society influences our decision making. In the realm of games, chess is deterministic: both players have all the information, and winning or losing a game is causally linked to the quality of decisions you make. Poker, however, is probabilistic: each player’s information is limited, and the outcome of any hand depends to some extent on which card flips over in front of which player (and their seating arrangements), so winning or losing a game is always a combination of decision quality and luck.

“Resulting” means categorizing a decision as good or bad based on whether the situation yielded a positive or negative outcome. This behavior drastically undervalues the role of luck in outcomes, and risks cementing poor decision making habits into the fabric of an organization. Conversely, active separation of the decision from the outcome, and objectively attributing the outcome to either luck or skill, is essential to improving decision making quality.

Business is a game of chance. The outcome of any complex scenario, whether it is an enterprise sale or a marketing program or a fundraising round or an executive search, depends somewhat on which events unfold in which order. In an organization led by a chess player, positive outcomes arise from “good” decisions alone, and negative outcomes arise from “bad” decisions alone. The implications are significant and pervasive: who gets promoted (or fired), which tactics become “best practices” (or taboo), etc., could all be a function of luck. Confirmation bias (among others) becomes cemented in the leader’s inner circle. In an organization led by a poker player, the culture includes open discussion about confidence levels and risk reduction, constructive dissent (i.e., playing “Devil’s Advocate”), and active eradication of cognitive bias.

So consider what example you set for your team, how you coach them to to make better decisions, who you involve in pre- and post-mortems of significant decisions you make. Are you “resulting” or are you leading them like a champion poker player?

Two ways to build trust in a new manager relationship

Like many things in life, these options could be summarized as: the easy way, or the hard way. And I am not going to post the link to the Boondocks clip. You’ll have to find it yourself.

There's the easy way, and ...
There’s the easy way, and …

Manager relationships are…relationships. Establishing trust is essential for both parties to feel valued, engaged, and satisfied. Getting to that point in a short period of time, without triggering tears or rage, is essential for the long-term health of any relationship. And it doesn’t happen by accident. This post focuses on the employee-manager relationship; feel free to abstract these concepts to other relationships at your own risk.

Building trust requires establishing a mutually agreed level of autonomy for the employee under the guidance of the manager in two key dimensions:

  • time span of discretion: what is the longest duration task for which the employee can take complete accountability? Viewed another way, how long is the manager willing to wait for a status update?
  • delegated decision authority: which decisions can the employee make without consulting and or informing the manager?

Time Span of Discretion

Credit for this term goes to Eliot Jaques, whose book The Requisite Organization is underrepresented in the modern leader’s library. I will warn you that it is not a casual read; be aware that the large conceptual rewards packed into this book require a large investment of attention. With that disclaimer out of the way, the idea from the book that I’m highlighting here is about what duration task the employee has the trust of the manager to execute independently. Does the manager want to see a daily task list and a midday status update? In this case the time span of discretion is somewhere between 4-10 hours. At the other end of the scale, CEOs often embark on multi-year global transformation programs with the hands-off support of their Boards, often requiring quarterly status reports at a maximum.

Delegated Decision Authority

The best metaphor from this concept that I’ve encountered is the Decision Tree from Susan Scott’s book Fierce Conversations. Just as a tree’s roots, trunk, branches, and leaves have different weighting on the future health of the tree, the levels of decision making have different weighting on the future health of the organization (or the career of the decision maker). I’ve summarized the concept in the table below:

decision tree table

For example, the pair might decide that any decisions around hiring, firing, or promotion are Trunk decisions. Which vendor to choose for the trade show giveaways is a Leaf decision. And so forth.

Now that we’ve defined the two essential components to establishing trust, let’s address the original question of HOW to get there:

  • The Easy Way: proactive, implicit, inductive. Sit down with the other party and discuss, before any specific events occur, what level of decision making authority will be delegated and what is the time bound of discretion. Establish the boundaries of the relationship before they are tested. In another context, how do you learn your way around a new city? Look at a map before you leave the house, ask your neighbors which parts of town to avoid.
  • The Hard Way: reactive, explicit, deductive. Jump into it, wait for things to happen and then talk about whether the events fit within the desired boundaries of the relationship. This approach to learning the new city is to wait for sunset and then wander out the front door with some cash in your front pocket and hope you make it back in one piece.

My intent in writing this piece is to raise your awareness of what will help define trust in your manger relationships and how you are going about establishing it. You can choose to take the hard way without judgement; just be aware of the potential bumps and bruises you might encounter along the way.

Thanks to Dan Schultz for inspiring this post. Questions or feedback? Leave a comment!

Are you a normal thinker in a power-law world?

Along with celebrating the holidays, eating cookies, catching up on sleep, eating cookies, and doing fun projects with the kids (did I mention the cookies?), one reason I enjoy the year-end is the chance to chip away at the stack of unread books piling up in my house. A particularly thought-provoking book in this year’s batch is Peter Thiel’s Zero to One, which has earned a spot on my recently revised Essential Reading List.

This post is not a book review, but rather a highlight of an idea Thiel introduces early in the book and has appeared in my daily thoughts since reading it. He reminds us that conventional Western thought trains us to think of outcomes as following a normal (random) distribution, but in fact both the natural and business world follow a power law distribution. Accepting this re-framing of the world around us is easy in theory, and changing our choices in life as a result can be very difficult.

Some are mean, some have no mean
Some are mean, some have no mean

The idea itself is not original – from the application of mathematical theories to the emerging computer science field in the 1950s, to Malcolm Gladwell’s 2006 New Yorker article, to Taleb’s Black Swan – but Thiel’s framing of the concept, and its implications, is novel.

Many of us are taught to value breadth over depth, and to avoid “placing all of our eggs in the same basket.” We are coached to believe that well-roundedness is a virtue but hyper-specialization is “weird.” The entire premise of the liberal arts education system, from classical to modern times, is to provide foundational knowledge in a broad range of topics. [Personal note: not all institutions follow this mantra. The feedback I heard after being rejected from MIT’s undergraduate engineering program was that I was “too well rounded.”] As students and professionals, we are graded on a curve (the normal distribution). We are advised that portfolio diversification is the safest and most profitable theory of investment.

But strategy is about trade-offs. A business must choose to specialize in a certain market, geography, or product domain in order to reduce competition and increase profit. We cannot diversify our professional lives by being partially invested in many careers. At some point, we must choose to specialize in a function, industry, or growth stage in order to excel.

Sure, it’s interesting to think about whether phenomena like marathon finishing times, portfolio company performance, emissions, or health care spending follow a normal or power law distribution (at least for a few moments). But how can we apply this new way of framing the world? Here are a few ways to put this theory to action in life:

  • Think, plan, and go deep – from an early age. Find out what you (and your kids) are passionate and talented in, and build expertise. The most knowledgeable and talented people in any discipline are always in demand, regardless of market cycles.
  • Take risks with definite outcomes. Be certain, which means being certainly right or wrong, not indefinitely indeterminate. Too many of us hide behind a fear of failure and instead drift along in the middle of the pack without achieving much.
  • Concentrate your investments in a much smaller number of areas: in your professional pursuits, and your personal interests. As the new year begins, instead of asking yourself “what else can I start doing?” think about what you can stop, in order to focus your mental and physical energy on the few things you do best and enjoy most.

Does this resonate with you? Sound completely crazy? Leave a comment and let me know! Regardless, have a happy, healthy, and prosperous 2015.

There are only 4 jobs in business: which are you pursuing?

Here’s a quick post to summarize a conversation I had a few weeks ago about my own career path (thanks, Michael Schreck). Hopefully, this framework will be useful for other people exploring career development options.

At some point in our careers, we must choose to specialize. For some people this occurs very early, for example entering an apprenticeship at age 16 to learn a skilled trade. Others make this decision after working in the same functional role across industries, or in different functional roles in the same industry, or after a stint in consulting.

So what are you going to specialize in? Let’s simplify by stating that all business roles follow one of four tracks:

  • Fund raisers: These people raise funds to support transactions and investments, typically through private equity funds, hedge funds, exchange traded funds (ETFs), mutual funds, or debt/equity offerings. You will succeed in this job if you love building pitch books, are already a famous and massively wealthy investor, and/or are such a fantastic salesperson that you can convince people to part with millions of dollars for the chance to own a sliver of something that won’t exist for years.
  • Deal makers: Once the funds have been raised, it’s time to put the dry powder to use by buying something. While many corporate development teams, venture capital & private equity groups manage deal flow and close transactions on their own, the deal makers that grab the largest share of the spotlight are investment bankers. Spending an unsustainable percentage of your life revising pitch decks is also a hallmark of this career path. but for those who succeed in riding the M&A waves, countless bespoke suits and limited edition watches await.
  • Profit takers: Once the fireworks around the deal have faded, someone’s got to execute the strategy. The owners of any business, ranging from a sole proprietorship to a limited liability company to a corporation, bear the risk of the ongoing operation, and also have the first cut of the retained earnings. [Updated thanks to a helpful comment by Pete Bondi] The owner’s role is to create: new products, services, and content that attract customers and retain competitive advantage. Recent studies show that most CEOs of large corporations have finance backgrounds, and all have had to climb the ladder by succeeding in operational and sales roles, in addition to any functional experience. US tax return data shows that higher earners are more likely to be self-employed, so the appeal of “owning something” can also be quite lucrative.
  • Advisors: After some feedback and discussion about this post, I’ve added a fourth category to include career consultants. Now anyone who has run a consulting business would put themselves in the third category above, but there are plenty of talented people who can lead long, fulfilling careers as non-partner, subject matter experts on the consulting track, without ever participating in the execution of their analyses.

Which path are you on? Why? Are you at an inflection point in your professional development? Sometimes eliminating an alternate path can help increase dedication to the path you’re on – so take a good hard look at the grass on the other side of the fence and make your decision.

Jury Lesson #2: When Did You Decide?

Last week I was selected to the jury for a civil trial seeking personal injury damages. My first post on this topic compared the jury’s decision in the trial to a customer’s buying process. In this post, I’ll explore when decisions are made an how they are (or aren’t) changed with additional information.

When did you decide about us?

I noticed myself making a snap decision about who should win the case–the defendant–as the judge read the case summary to us less than 20 minutes after stepping into the courtroom. This was the same decision I stuck with after two days of testimony, consideration, and discussion with my fellow jurors (more about “why people talk” in the third post in this series). While I’m far from perfect, self-awareness is a focus of my personal development, and I would consider myself reasonably aware of my biases. I consciously gave extra emphasis to evidence that opposed my snap decision. I did my best to put myself in the shoes of the plaintiff, imagining how the story of a truly terrible accident could sound implausible in the harsh light of a courtroom.

And as we, the jury, entered deliberations it seemed that everyone else had already reached a decision. Conveniently, we all agreed, and submitted our verdict in time to beat the rush hour traffic home. Driving home, I recalled other situations at work and at home where I knew I would be presented with a slate of evidence and asked to make a decision. Which CRM software should we install? Should we extend the timeline on the capital project? Can my daughter have another story before bedtime?

I’d propose that most of our decisions are made well before we’ve heard most (or any) of the evidence. Dual Process Theory suggests that “system 1” evolved to make lifesaving decisions quickly, and still dominates (see my previous post on how soak time can improve complex decisions). In their book Switch, Dan & Chip Heath characterize our belief-based decisions as an elephant with a rational rider attempting to steer it along (read a summary at Soundview). We must also be vigilant against confirmation bias when our role is to make objective decisions.

So the next time you encounter a similar situation, practice building awareness of when you’ve formed a decision, and to what extent additional evidence alters that decision. When did you decide who to vote for in the next Presidential Election??

Why Wait? How soak time can help you weigh your options

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?”

Decisions can make us feel stuck

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:

  1. 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?
  2. 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?
  3. 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.