Making decisions is a fundamental life skill. Expecting to make perfect decisions all of the time is unreasonable. When even an ounce of luck is involved, good choices can have bad outcomes. So our goal should be to raise the odds of making a good decision. The best way to do that is to use a good decision-making process.
– Work on the right decision problem. The way you frame your decision at the outset can make all the difference. To choose well, you need to carefully state your decision problems, acknowledge their complexity, and avoid unwarranted assumptions and option-limiting prejudices.
– Specify your objectives. A decision is a means to an end. Ask yourself what you most want to accomplish and which of your interests, values, concerns, fears, and aspirations are most relevant to achieving your goal. Decisions with multiple objectives cannot be resolved by focusing on any one objective.
– Create imaginative alternatives. Remember: your decision can be no better than your best alternative.
– Understand the consequences. Assessing the consequences of each alternative frankly will help you to identify those that best meet your objectives all your objectives.
– Grapple with your tradeoffs. Because objectives frequently conflict with one another, you’ll need to strike a balance. Some of this must sometimes be sacrificed in favor of some of that.
– Clarify your uncertainties. What could happen in the future, and how likely is it that it will?
– Think hard about your risk tolerance. When decisions involve uncertainties, the desired consequence may not be the one that results. A much-deliberated bone marrow transplant may or may not halt cancer.
– Consider linked decisions. What you decide today could influence your choices tomorrow, and your goals for tomorrow should affect your options today. Thus many important decisions are linked over time.
This framework can help you make better decisions. Of course, sometimes good choices go wrong. A good decision, however, increases the odds of success.
Define the problem. Managers often act without a thorough understanding of the problem to be solved, leading them to solve the wrong problem. Accurate judgment is required to identify and define the problem. Managers often err by defining the problem in terms of a proposed solution, missing a bigger problem, or diagnosing the problem in terms of its symptoms. Your goal should be to solve the problem, not just eliminate its temporary symptoms.
Identify the criteria. Most decisions require you to accomplish more than one objective. When buying a car, you may want to maximize fuel economy, minimize cost, maximize comfort, and so on. The rational decision maker will identify all relevant criteria in the decision-making process.
Weight the criteria. Different criteria will vary in importance to a decision-maker. Rational decision-makers will know the relative value they place on each of the criteria identified. The value may be specified in dollars, points, or whatever scoring system makes sense.
Generate alternatives. The fourth step in the decision-making process requires the identification of possible courses of action. Decision-makers often spend an inappropriate amount of search time seeking alternatives, thus creating a barrier to effective decision-making. An optimal search continues only until the cost of the search outweighs the value of added information.
Rate each alternative on each criterion. How well will each of the alternative solutions achieve each of the defined criteria? That is often the most difficult stage of the decision-making process, as it typically requires us to forecast future events. The rational decision-maker carefully assesses the potential consequences of each of the identified criteria for selecting each alternative solution.
Compute the optimal decision. Ideally, after all of the first five steps have been completed. The process of computing the optimal decision consists of multiplying the ratings in step 5 by the weight of each criterion, adding up the weighted ratings across all of the criteria for each alternative, and choosing the solution with the highest weighted ratings.
Rational decision frameworks, such as those suggested above, are a great starting place. On top of that, we need to consider our psychological biases.