Back to Basics: Re-engineering Decision Making to Make More, Faster, and Better Decisions
Elon Musk used this method of thinking to transform Tesla into a supply chain powerhouse and launch low-cost rockets into space. Reid Hoffman positioned Netflix to dominate the online streaming industry with nearly 200 million subscribers by incorporating this ancient thought process.
What is it? Reasoning from first principles, and when applied to decision making, can help to supercharge and simplify how you make decisions.
The case for something better
A study by Gartner of business decision makers and executives in 2018 found that bad financial decisions cost firms more than 3% of profits. Assuming the average small business in the US or Canada generates $100,000 in annual revenue, this impact is $3,000+ in lost profit. A not insignificant amount of money and worthy of a change in behavior to keep this cash in your pocket.
In addition, the sheer quantity of decisions mangers must make on a daily basis is staggering. Routine, strategic, policy, personnel, organizational, individual, and personal decisions are faced head on every day. It's no wonder that decision fatigue sets in by 10am and rapid fire (and often inaccurate) decisions are the norm thereafter.
So how can a manager effectively process all the decisions they face, faster, and with a better outcome? By considering a back to basics, building blocks approach to decision making and then focusing their effort where it counts the most.
Aristotle's axiom
Musk and Hoffman both leveraged the first principles way of thinking, initially conceived by Aristotle more than two thousand years ago. The philosopher defined first principles as "the first basis from which a thing is known." This deconstructive thought process, now common in engineering and the sciences, aims to break down a problem into its most basic consistent elements and then reassemble them from the ground up.
For decisions, this means taking a step back and pressing pause on knowledge, analogies, biases, and other factors which influence your decision making to consider the most basic building blocks of any decision.
Decision building blocks: tear it down and build it up
Let's start with a definition. A decision is simply something you choose.
Most decisions we make are done so automatically and we prefer it that way. Decision will power is finite and every time we have to engage the logical and thinking parts of our brain to consciously make a decision, we chip away our ability to make a good decision next time. Daniel Kahneman does a magnificent job detailing the two models of thought (System 1 - fast, automatic, and System 2 - slow, logical) in his book Thinking, Fast and Slow.
We need to keep as many decisions as possible in the automatic realm of System 1 and only engage System 2 when it really counts. This can be done by identifying the type of decision and associated actions, but first we need to consider the most basic elements of a decision.
All decisions have three core elements: people, impact, and complexity.
People - a party of one, your team, your customers, or your entire organization. For every decision you make, people are involved.
Impact - this is the degree to which your business is impacted by your decision, usually measured in financial terms.
Complexity - does your decision involve a lot of analysis or research or is it relatively straightforward?
It all comes down to priority
As you're making decisions, consider how these three elements fit together in the context of priority to decide how you want to engage with these decisions.
For example, just a few people, low impact to your business, and a very simple A or B choice? That's a low priority decision. Make a decision and move on. These are the majority of decisions you encounter; don't let them burn you out.
Alternatively, maybe you need to make a policy decision on whether or not to purchase stand-up desks for your entire team so that they can work more effectively at home during the pandemic? This would be a medium priority decision. More people involved, a moderate level of impact to your business given the balance of cost and productivity improvements, and the complexity is moderate when considering supplier selection and delivery and setup logistics.
Or, as is the case now during the pandemic, many business owners are faced with making high priority decisions. Pivoting to a new business model, new or changing customer expectations, new supply chains, or methods of financing are all associated with high priority decisions. This where your focus needs to be.
Decisions reconstructed: how it all fits together
As shown in the triangle below, here's how the first principles model for decision making fits together.
The base consists of the number of people involved in the decision, the impact the decision will have on your business, and the complexity of the decision. Once you get a feel for the magnitude of these elements, you can then determine if your decision is low priority, medium priority, or high priority.
If you're like the majority of managers or business leaders, you spend far too much time on low priority decision as these are the most common. To make more, better, and faster decisions, you need to flip your thinking. Keep the low priority decisions on autopilot and make them fast. Place the effort where it counts, and spend more of your time on medium and high priority decisions.
3 key takeaways
1. First-principles can be used to break down a problem into its most basic elements. When applied to decision making, it can help you make more, faster, and better decisions.
2. Decisions are built on a foundation of three common elements: people, impact, and complexity. Consider each when identifying and classifying decision type.
3. The magnitude of these elements dictates whether a decision is low priority(autopilot), medium priority(think about it), or high priority (detailed analysis). Identify the type of decision before investing time to solve it.
Here's to more, faster, and better decisions and driving great results!
-luke
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I appreciate the time you took out of your day to read this! You can find more articles like this from me on my Driving Great Results blog and learn more about how I can help you drive great results though simplicity at Sheppard & Company. For news and insights and to see what I do when I’m not working, follow me on Facebook @ljsheppar.
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Luke Sheppard is the founder and principal of Sheppard & Company Management Consultants, a business consulting firm dedicated to helping entrepreneurs and managers achieve great results through simplicity.
Luke is the author of the soon to be released book (February, 2021) Driving Great Results: Master the Tools You Need to Run a Great Business. For a FREE excerpt of the book, click here.
References
https://plato.stanford.edu/entries/aristotle-metaphysics/