The first lie about decision-making
Some time ago, to my question of how he made big decisions, my then boss and CEO had said he follows his gut.
My jaw had hit the floor. The CEO of the company decides by gut! And here I was hoping for a time-honored process, the recipe to which would be worth an arm and a leg.
I was wrong. He was right.
Classical rational-model decision-making has a recipe: Collect all information you need, order your preferred set of outcomes, list probabilities for each, calculate and compare expected outcome values, and it’s very likely that you’ll reach the same conclusion as your CEO, or Einstein.
That’s how you buy a car, a TV, a laptop. Information is:
✔Available
✔Reliable (unchanging with time)
✔Objective
You’ve the luxury of time (tomorrow is the same as today) and inexperience (high level of certainty makes experience surplus to need).
But a CEO does not get paid to decide on the right car or TV or laptop. She gets paid for capital allocation. Where to put money? Which bets to make?
I experienced this while working on investment decisions, where information is:
❌Missing
❌Unreliable (changes with time)
❌Subjective (how do you judge the character of a founder?)
Enter: trade-offs. Could you give up accuracy for speed? What steps can you skip? How much uncertainty can you bear? These become the new big questions.
If you’ve only learned the neat classical process at decision-making school, you’re in for a shock.
A line cook knows the dish needs tomatoes at a certain temperature. The chef knows what to do when it gets too hot or cold, or the pantry’s out of tomatoes.
This is called gut. Aka experience, judgment, intuition.
(Experience is not the same as intuition but for simplicity we can assume so).
Experience means you’ve been in such a situation before, and learned. You can spot past patterns in what you’re trying to solve today.
The hardest decisions are made under uncertainty. There are no set options to pick from, only a set of possibilities without clear probabilities. This is at the heart of naturalistic decision-making.
Classical decision-making will help you buy your car, laptop, or even house. Anyone can build this skill as long as they can measure and compare and they’re trained in the process.
But building naturalistic decision-making skills will make you rare and valuable. This is what CEOs are paid for, military commanders are trusted for, and MS Dhoni is idolized for.
