Frame it right: Unpacking the science of better decisions
We continually make decisions, as both entrepreneurs and individuals, and over time we become products of the choices we make. By framing the problem correctly, creating emotional distance and being aware of our cognitive biases, we can improve the quality of our decisions and navigate our lives with more clarity.
Published June 5, 2018
The monotony of my Friday ride back home, through the now infamous Bangalore traffic, was broken by call from Jai D’Costa, the CEO of K12 Techno services. Jai is one of our star CEOs, having built K12 into a large education platform by turning around a business that was staring at oblivion less than four years ago. Sequoia Capital was a close partner in this journey and remains his first port of call when he had big decisions to make. This was one such call.
Jai had a simple capital allocation question on his mind: whether or not to provide a $1M advance to his vendor in return for substantially better margins. This was an arbitrage situation between K12’s ~10% capital cost and the vendor’s 20%. The potential ROI on the investment was good and EBIDTA would improve by $300k, resulting in a higher valuation for the company. Sounds like a good deal, right?
If you answered yes to the question above, you have just fallen prey to a concept called “Narrow Framing” in the science of decision making.
In life, some decisions we make – such as picking a college, choosing our life partner, or pivotal career decisions – will have disproportionate impact on our life’s direction and outcomes. If you are an entrepreneur like Jai D’Costa, you are making several decisions each week, some of which may change the trajectory of your company.
An investment firm like Sequoia makes several decisions on a daily basis. We see around 100+ companies each month but end up recommending investments in only one to two of them. While these decisions seem to be made at scale, the reality is that only a few of these investments, and hence those decisions, will drive the bulk of the fund’s returns.
Because getting our decisions right is what defines our success, I have become a curious student of the science of making better decisions. Here’s a few things I’ve learned about frameworks for decision-making, some of biases that trip us and how to improve the chance of making better decisions.
Right process to match decision types
Not all decisions deserve equal attention. We make many decisions every day that we don’t even know we are making, like the right running speed to catch a ball; evolution has designed our brains for efficiency by hardwiring many decisions that seem automatic.
Conscious decisions are different, and can be classified as:
– Important/High impact vs Mundane/Low impact decisions: Picking your co-founder, for example, is an important and high-impact decision which requires considerably more deliberation compared to say, choosing party attire. The process for high-impact decision making should be elaborate, thoughtful and done in a way to reduce errors.
– Urgent Vs less time-sensitive decisions: Reacting to your competitor’s aggressive pricing decision requires both immediate analysis and a potential response, as opposed to a decision to redo office décor. For urgent decisions, there may be a tradeoff to make between speed and accuracy and the decision process should be designed accordingly. Sometimes the decisions that are not time sensitive may not really be decisions at all and inaction may well end up being the right response. Things change and the reason to make that decision may actually disappear.
Another factor we often forget to consider is the reversibility of decisions. In his 2015 annual letter to shareholders, Jeff Bezos talks about his philosophy to decision making, and explains the need to stay flexible once you’ve made decisions that are reversible because they are, effectively, two-way doors. The decision-making process for reversible decisions should be light-weight, he argues, as the impact of them being wrong is low.
But in a fast-moving world, speed is critical to decision making. Instead of waiting for 90% of the data we need to make a decision, it’s often better to make it with 70% of the data, Bezos argues; he believes slow decision making may actually be more expensive than fast on the draw, provided you have the ability to correct bad decisions early on. This is an argument research, which shows that additional data has diminishing marginal utility from a decision-making accuracy perspective; the extra data seems to improve the confidence of the decision maker rather than the choice being made.
Finally, there’s intuition. Backing your gut feeling is often a very good way to make decisions, especially complex ones. There’s a lot of interesting research that talks about how the brain-gut axis is actually a powerful communication superhighway, constantly exchanging updates on the state of affairs. Researchers have concluded that the feeling you have in the gut about something being right or wrong is actually an informed ‘snap judgement” which happens sub-consciously when the brain draws on past experiences and external cues to make a decision.
Getting better at decision making
Right framing: Framing the decision situation or the problem statement right is where you can get the highest leverage in the decision-making process. If the right set of questions are surfaced, the answers found will lead to a better decision than if we framed the issue incorrectly or too narrowly. We often get into the ‘this OR that’ or ‘whether OR not’ dichotomy (in a way implicitly killing more powerful AND solutions), which leads to what’s called ‘narrow framing’ the solution set resulting in sub-optimal decisions. As an entrepreneur, you may be deciding between “growth or profitability”, or whether to raise VC money or not. By questioning the frame of reference and stepping back to abstract yourself to a higher level, you may unlock better answers or more importantly, widen your choices, resulting in a better decision.
At a school orientation program for my son’s admission, the Principal asked the parents how many other schools they were applying to. Interestingly, only 25-30% of the parents mentioned they had applied to more than one school. Seventy percent had only applied to only this one school (a popular one of course!). The Principal was rather puzzled at the lack of options in the parents’ decision-making approach. This situation is not unique. Researchers at Ohio State University interviewed a slate of CEO/COOs and analyzed 168 decisions they had made; they came to the stunning conclusion that more than one alternative had been considered in just 29% of those situations. Even the best business leaders can fall prey to narrow framing!
Creating distance: Perspective is everything. Sometimes the best thing to do before making a decision is to sleep on it. I wish I had followed that advice before buying a timeshare vacation package when I was 23, swiping my wife’s brand-new credit card to its $1500 limit amidst a bunch of folks who clapped in celebration. Had I walked out of the room and slept on it for a night I would have avoided what turned out to be the costliest weekend Kerala trip of my life – and the only one I ever took using that time share. That bit of distance allows us to move our emotions to the back seat and let logic take over the wheel.
Suzy Welch, the American business writer and journalist in her book titled “10/10/10” provides a simple but powerful framework to help make better decisions. She suggests we ask how we will feel about a decision 10 minutes from now, 10 months from now and 10 years from now. This framework provides us an elegant way to get distance on the decisions we make.
Avoiding cognitive bias: Our brain is designed to be efficient and uses past experience and rules-of-thumb to make sub-conscious decisions with speed. The downside of speed is sometimes accuracy, as we fall prey to cognitive biases. For example, association bias refers to us thinking more favorably of those people who are more like us – e.g. providing a preferential business deal to someone from your community. Confirmation bias makes us interpret new data to confirm our existing hypothesis and reject those that don’t fit our prior conclusions. Sunk-cost fallacy is another interesting bias that prevents us from moving on from bad decisions. The list of cognitive biases is too long to cover here, but a great read on this topic is “Thinking Fast, Thinking Slow” by Nobel Laureate Daniel Kahneman. The most interesting thing about cognitive biases is that knowing about the bias doesn’t cancel out the bias – a proper process must be put in place to avoid it.
Use sounding boards: Mentors or experts often help us widen our options, pressure test our assumptions and avoid mistakes. This could be a senior at work, your spouse or a friend who has some understanding of your life or business context. Industry experts are particularly helpful in providing base rates – how commonly something occurs, and they are often good for testing assumptions. Their questions could help us sharpen our decision!
We continually make decisions, as both entrepreneurs and individuals, and over time we become products of the choices we make. By framing the problem correctly, keeping short-term emotions in check, working hard to cancel our biases and selectively leveraging experts, we all have the ability to improve the quality of our decisions and navigate our lives with more clarity.
Coming back to Jai D’costa’s call: I pointed out that the vendor advance was narrowly framed as a ‘whether or not’ decision. By stepping back and framing the question as what the best use of an incremental $1 million was, it became clear to us that we should deploy it into our business for growth. Before I could celebrate my value-add, Jai came back with a more powerful construct where he found an alternate source to provide an off-balance sheet advance to the vendor AND was able to invest the million dollars in the business – a great example of widening the options and using the power of AND!