This is some very interesting research on the decision making process. More can be found here.
While we often make decisions with our gut, these decisions leave us susceptible to biases. To counter the gut decision a lot of organizations gather data and analyze decisions. The widespread belief is that analysis reduces biases.
But is putting your faith in analysis any better than using your gut? What does the evidence say? Is there a better way?
Dan Lovallo and Olivier Sibony set to find out. Lovallo is a professor at the University of Sydney and Olivier is a director at McKinsey & Company. Together they studied 1,048 “major” business decisions over five years.
What they discovered will surprise you.
Most of the decisions were not made based on gut calls but rather rigorous analysis. In short, most people did the all the leg work we think we’re supposed to do: they delivered large quantities of detailed analysis. Yet this wasn’t enough. “Our research indicates that, contrary to what one might assume, good analysis in the hands of managers who have good judgment won’t naturally yield good decisions.”
These two quotes by Warren Buffett and Charlie Munger explain how analysis can easily go astray.
I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections … — Warren Buffett
[Projections] are put together by people who have an interest in a particular outcome, have a subconscious bias, and its apparent precision makes it fallacious. They remind me of Mark Twain’s saying, ‘A mine is a hole in the ground owned by a liar.’ Projections in America are often a lie, although not an intentional one, but the worst kind because the forecaster often believes them himself. — Charlie Munger
But Lovallo and Sibony didn’t only look at analysis, they also asked executives about the process. Did they, for example, “explicitly explore and discuss major uncertainties or discuss viewpoints that contradicted the senior leader’s?”
So what matters more, process or analysis? After comparing the results they determined that “process mattered more than analysis—by a factor of six.”
While we often make decisions with our gut, these decisions leave us susceptible to biases. To counter the gut decision a lot of organizations gather data and analyze decisions. The widespread belief is that analysis reduces biases.
But is putting your faith in analysis any better than using your gut? What does the evidence say? Is there a better way?
Dan Lovallo and Olivier Sibony set to find out. Lovallo is a professor at the University of Sydney and Olivier is a director at McKinsey & Company. Together they studied 1,048 “major” business decisions over five years.
What they discovered will surprise you.
Most of the decisions were not made based on gut calls but rather rigorous analysis. In short, most people did the all the leg work we think we’re supposed to do: they delivered large quantities of detailed analysis. Yet this wasn’t enough. “Our research indicates that, contrary to what one might assume, good analysis in the hands of managers who have good judgment won’t naturally yield good decisions.”
These two quotes by Warren Buffett and Charlie Munger explain how analysis can easily go astray.
I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections … — Warren Buffett
[Projections] are put together by people who have an interest in a particular outcome, have a subconscious bias, and its apparent precision makes it fallacious. They remind me of Mark Twain’s saying, ‘A mine is a hole in the ground owned by a liar.’ Projections in America are often a lie, although not an intentional one, but the worst kind because the forecaster often believes them himself. — Charlie Munger
But Lovallo and Sibony didn’t only look at analysis, they also asked executives about the process. Did they, for example, “explicitly explore and discuss major uncertainties or discuss viewpoints that contradicted the senior leader’s?”
So what matters more, process or analysis? After comparing the results they determined that “process mattered more than analysis—by a factor of six.”
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