In business, we often make decisions without as much as the information as we’d like or need.
When Colleen and I outgrew our office space on the top of Queen Anne, we had to find a new location. In a rapidly growing city, this was not easy, and there is no crystal ball for projecting our firm’s growth or the stability of the economy. Finding a building and assessing the risk of signing a five-year lease was our responsibility.
That’s why I was intrigued by Carl Richards’ article about feedback loops, confidence and humans’ tendency to form self-serving bias. In case you’re unfamiliar with the term, a self-serving bias is formed when a person takes credit when they achieve desired outcomes and assign blame to another place when things go poorly.
Richards’ article was focused particularly on how overconfidence impacts investing, but I think this story also contains some important reminders for business leaders and managers. Here are some of my take-aways:
- When you assess risk, don’t just rely on your own experience or feedback loop. You should consider external factors that may play a significant role in the outcome. In the lease example, the health of the economy may play a factor on our ability to grow or the pace of our growth, which may have a direct correlation on how much office space we need.
- Albeit an imperfect science, assessing risk is important. Managers may want to institute formal processes in their organizations around this when making significant decisions. This might be a process as simple as listing all the possible consequences and assigning a probability to them.
- It’s also vital to consider the worst consequence and consider whether you can live with it. Richards uses an example of assessing avalanche risk when backcountry skiing. One consequence of an avalanche on a slope you’re skiing is death or serious injury. Being mindful of this may completely change your decision – or maybe influence taking up backcountry skiing at all. Similarly in business there are likely many risks that wouldn’t be taken if people thought about the absolute worst-case scenario before moving forward.
- Finally, overconfidence can lead to a lot of problems. According to Richards, experts are often overconfident, but I’ve also read articles that indicate less experienced people also have a propensity to overestimate their abilities. For more on this topic, check out my blog, “Think you know what your good at? Think again”. Another good resource on decision making is Charles Duhigg’s “Smarter, Faster, Better: The Secrets of Being Productive in Life and Business.”
The next time you’re faced with an important, yet risky, decision, I hope some of these ideas are helpful. If you have interesting examples of risk assessment done well, or even examples when things have gone awry, we’d love to learn about them.