Decision making as a leader

It is estimated that the average adult makes about 35,000 remotely conscious decisions each day (apparently according to Cornell University researchers, we make 226.7 decisions each day on food alone!).

Effective decision making is vital both to drive growth, and timely and decisive action can prevent minor issues from escalating into significant problems, preserving the organisation’s stability and reputation. In times of crisis or uncertainty, strong decision-making capabilities enable leaders to steer their companies through challenges with resilience and adaptability. 

For business leaders, their effectiveness is often measured by the quality of their decisions, making this skill an indispensable attribute.

Daniel Kahneman’s book ‘Thinking, Fast, and Slow’ does a great job to describe the process of decision making where combines information and instinct to help us form our judgement.  

In the book it describes that our mind combines two systems: System 1, the fast-thinking mode, operates effortlessly and instinctively, relying on intuition and past experiences. In contrast, System 2, the slow-thinking mode, engages in deliberate, logical analysis, often requiring more effort.

Warren Buffet is often praised for his decisive decisions.  In 2008, at the peak point of the global financial crisis the legendary investor invested $5 billion in Goldman Sachs to strengthen the firm's capitalisation and liquidity, where he reportedly made the decision in one weekend. 

In his annual shareholder letter each year Warren Buffet writes that it is his job to make just one good decision a year, but of course it does mean he is making many decisions each day, it’s just a decision to not invest and do nothing.

Decisions are what to do but also what not to do and they carry consequences that are both good and bad.  I personally think we should always ask ourselves does it fit with our agreed strategy to achieve our vision, what are the levels of risk, what resources will be required using both systems from Kahneman’s fast and slow thinking.

Leaders must also balance short-term gains with long-term sustainability, considering the broader impact on stakeholders, including team members, customers, and the wider community.

Finally, it’s also important to stress that in a typical day one cannot remain in the “decision mode” all day or you will burn out. It is important to delegate most if not all operational decisions to free up your time and energy to focus on they key things.

Look forward to everyone’s thoughts.

What systems and frameworks do you use to help make decisions?

Thinking Fast and Slow Summary at Glance

If you’re a person who takes a lot of time to make a decision or makes rash decisions that cause regret later, then this Thinking, Fast and Slow summary is for you.

Daniel Kahneman’s book ‘Thinking, Fast, and Slow’ is about two systems, intuition and slow thinking, which help us form our judgment. In the book he walks us through the principles of behavioral economics and how we can avoid mistakes when the stakes are high. 

He does this by discussing everything from human psychology and decision-making to stock market gambles and self-control. 

The book tells us that our mind combines two systems: System 1, the fast-thinking mode, operates effortlessly and instinctively, relying on intuition and past experiences. In contrast, System 2, the slow-thinking mode, engages in deliberate, logical analysis, often requiring more effort.

Kahneman highlights the “Law of Least Effort”; the human mind is programmed to take the path of least resistance, and solving complex problems depletes our mental capacity for thinking. This explains why we can’t often think deeply when tired or stressed.

He also explains how both systems function simultaneously to affect our perceptions and decision-making. Humans require both systems, and the key is to become aware of how we think so we can avoid significant mistakes when the stakes are high. 

Key Takeaways from Thinking Fast and Slow by Daniel Kahneman

1. Functioning quickly without thinking too much 

The first system of the human mind makes fast decisions and reacts quickly. When playing any game, you have a few minutes to decide your next move; these decisions depend on your intuition. 

We use System 1 to think and function intuitively during emergencies without overthinking. 

System 1 involves automatic, swift thinking, lacking voluntary control. For instance,  perceiving a woman’s facial expression on a date, you intuitively conclude she’s angry. This exemplifies fast thinking, operating with little voluntary control.

2. Giving full attention to all your complex decisions

The second system of the human mind requires more effort to pay attention to details and critical thinking. System 2 engages in reflective and deliberate thought processes for problem-solving. 

You engage in deliberate, methodical thought if you’re given a division problem to solve, like 293/7. This reflects slow thinking, requiring mental activities and conscious effort.

When we face any big challenge or try to take a deep look at situations by employing System 2, we can solve critical situations by focusing our attention on the situation at hand. While the first system generates ideas, intuitions, and impressions, the second system is responsible for exercising self-control and overriding System 1’s impulses.

3. Cognitive biases and Heuristics

The author discusses cognitive biases and heuristics in decision-making. Biases like anchoring, availability, confirmation bias, and overconfidence significantly influence our judgments, often leading to suboptimal choices. Awareness of these biases is the first step towards mitigating their impact.

The writer explains this with a bat and ball problem. A bat and a ball cost $1.10 together, and the bat costs $1 more than the ball. What is the cost of the ball?

Most people will answer $0.10, which is incorrect. Intuition and rash thinking force people to assume that the ball costs 10 cents. However, looking at the problem mathematically, if the cost for a ball is $0.10 and the bat is $1 more, then that would mean the bat costs $1.10, making the total $1.20, which is wrong. It is a System 2 problem, requiring the brain to see a $0.05 ball plus a $1.05 bat equals $1.10.

Similarly, people often assume that a small sample size can accurately represent a larger picture, simplifying their world perception. However, as per Kahneman, you should avoid trusting statements based on limited data.

Heuristics and biases pose decision-making challenges due to System 1. System 2’s failure to process information promptly can result in individuals relying on System 1’s immediate and biased impressions, leading to wrong conclusions.

4. Prospect Theory

As per the Prospect Theory by Kahneman, humans weigh losses and gains differently.  Individuals can make decisions based on perceived gains instead of perceived losses. 

Elaborating on this loss aversion theory, Kahneman observes that given a choice between two equal options—one with a view of potential gains and the other with potential losses—people will choose the option with the gain because that’s how the human mind works.  

5. Endowment Effect

Kahneman also highlights a psychological phenomenon called The Endowment Effect. The theory focuses on our tendency to ascribe higher value to items simply because we own them. This bias has profound implications for economic transactions and negotiations.

The author explains this by telling the story of a professor who collected wines. The professor would purchase bottles ranging in value from $35 to $100, but if any of his students offered to buy one of the bottles for $1,000, he would refuse.

The bottle of wine is a reference point, and then psychology takes over, making the potential loss seem more significant than any corresponding gains. 

6. Regression to the mean

Kahneman delves into the concept of regression to the mean—extreme events are often followed by more moderate outcomes. 

Recognizing this tendency allows accurate predictions and avoids undue optimism or pessimism. For instance, an athlete who does well in their first jump tends to under-perform in the second attempt because their mind is occupied with maintaining the lead.

7. Planning Fallacy

The Planning Fallacy highlights our inherent tendency to underestimate the time, costs, and risk-taking involved in future actions. Awareness of this fallacy is essential for realistic project planning and goal-setting. 

Suppose you are preparing for an upcoming project and predict that one week should be enough to complete it, given your experience. However, as you start the project, you discover new challenges. 

Moreover, you fall sick during the implementation phase and become less productive. You realize that your optimism forced you to miscalculate the time and effort needed for the project. This is an example of a planning fallacy.

8. Intuitive expertise

Kahneman explores the concept of intuitive expertise, emphasizing that true mastery in a field leads to intuitive judgments. 

We have all seen doctors with several years of experience instantly recognizing an illness based on the symptoms exhibited by a patient. However, even experts are susceptible to biases, and constant vigilance helps avoid errors of subjective confidence.

9. Experiencing and remembering the self

Kahneman writes about the Two Selves, i.e. the experiencing self and the remembering self. 

Let’s try to understand this with a real-life experience. You listen to your favorite music track on a disc which is scratched at the end and makes a squeaky sound. You might say the ending ruined your music-listening experience. However, that’s incorrect; you listened to the music, and the bad ending couldn’t mar the experience that has already happened. This is simply you mistaking memories for experience.

Rules of memory work by figuring out preferences based on past experiences. The remembering self plays a crucial role in the decision-making process, often influencing choices according to past preferences. For example, if you have a good memory about a past choice, and are asked to make a similar choice again, your memory will influence you to pick the same thing again. 

It is important to distinguish between intuition and actual experiences. The experiencing self undergoes events in the present, while the remembering self shapes choices based on memories. Understanding this duality prevents overemphasis on negative experiences.

Popular Thinking Fast and Slow Quotes

Below are some of our favorite quotes from the Thinking, Fast and Slow summary:

The main function of System 1 is to maintain and update a model of your personal world, which represents what is normal in it.

One of the primary functions of System 1 is to reinforce the worldview we carry in our mind, which helps us interpret the world regularly, reflecting what is considered normal in our environment and differentiating it from the unexpected

Nothing in life is as important as you think it is while you are thinking about it.

Our perceptions of importance are often exaggerated when actively thinking about something at the moment. We often miss the bigger picture by limiting our thinking to a singular thing at the moment

The illusion that we understand the past fosters overconfidence in our ability to predict the future.

The human mind can sometimes think that it can fully comprehend the past, which leads to overconfidence in predicting future events. Often, we keep telling our mind, “I know how this situation ends,” as we have faced a situation in the past that made us overconfident about the outcome

You are more likely to learn something by finding surprises in your own behavior than by hearing surprising facts about people in general.

Personal self-discovery through unexpected aspects of one’s own behavior is a more effective learning process than being presented with surprising facts about people in general. After all, a lived experience is a better teacher

The idea that the future is unpredictable is undermined every day by the ease with which the past is explained.

People often oversimplify and confidently explain the past because of the hindsight bias. However, the future truly is unpredictable, and human beings have a tendency to underestimate the complexity of historical events

Ahead of the shareholder meeting, Warren Buffett published Berkshire’s annual shareholder letter. This piece looks at one key takeaway from that letter – how Buffett’s stupendous returns over 58yrs at Berkshire are almost entirely driven by just a dozen decisions i.e, one every five years. Astonishing indeed.

“What he’s suggesting is that phenomenal success isn’t about getting every decision right. It is about getting important decisions phenomenally right. In fact, Mr. Buffett himself says that most of his investments have been marginal or no better than mediocre. His average of one truly good decision every five years was still enough for that satisfactory return of 3,787,464%.

“The weeds wither away in significance as the flowers bloom,” wrote Berkshire’s chairman and chief executive. “Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s.”

People read Warren Buffett for the same reason they watch Stephen Curry: They want to see how it should be done, even if they can’t do it themselves.

His legendary investor letters are insightful, wise, simple and yet somehow contrarian. They are also modest. Most investors who beat the market would prefer to forget the decisions they botched, but this billionaire often seems more comfortable reminding disciples about his mistakes and musing about his failures.

When he does explain his extraordinary success, Mr. Buffett makes it sound ordinary. He looks for sensibly priced opportunities at big companies with honest people, competitive advantages and “understandable, enduring and mouthwatering economics.” Then he credits the magic of compounding interest, the good fortune of living in the U.S., the execution of basic ideas, the avoidance of colossal errors and a generous slathering of luck, like hot fudge on a Dairy Queen sundae.”

He then speculates on the dozen decisions, one of which is likely not a stock purchase decision – instead the decision to partner with Charlie Munger, the most invaluable of them all.

Amongst the stocks he reckons could feature in there are Coca Cola, American Express, See’s Candies, BNF railroads, Bank of America and Apple. But perhaps the most significant could be take overs of Berkshire Hathaway Energy and GEICO.

“This romance began in 1951, when Mr. Buffett learned that his professor and intellectual hero Benjamin Graham was chairman of Geico and rode the train from New York to Washington to visit its corporate headquarters. He arrived on a Saturday morning only to discover that Geico’s employees weren’t in the habit of working on Saturday mornings. Finally, a custodian heard Mr. Buffett pounding on the doors and not only let him inside but introduced him to the other person in the office, which is how the eager young student found himself receiving an education in the insurance business from the CEO.

The compassion of a weekend janitor would alter the course of business history, as Mr. Buffett’s investment in Geico began his lifelong fascination with insurance. When he acquired National Indemnity, which belongs on any list of Mr. Buffett’s career highlights, the process was similarly informal. After he heard from a friend that the company was for sale, he wrote a two-page contract to buy it from another friend. The deal came together in 15 minutes.

“It’s one of the best capital-allocation decisions in history,” said Lawrence Cunningham, the author of “The Essays of Warren Buffett.” “And it epitomizes Buffett.””

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I once read The role of the CEO is first to become unnecessary for any for any operational decision. That means that all of the decisions that need to be made for the company to successfully achieve current goals (for me it’s next 12 months) doesn’t require CEOs attention.

The role of a CEO is to cultivate company culture, align strategy with vision and take strategic decisions. If you had to take strategic decisions (that have 3–5 years long impact) every day, they wouldn’t be strategic at all.

What's it like to be the CEO of a large company. I'm the Founder and now retired CEO of a very large company. You have to understand the role of a CEO. He or she is the company's Chief Executive Officer. There's no higher position in the business. The CEO responsible for every facet of the company. During my career as a CEO I, and others like me, are faced having to make dozens and dozens of decisions. These decisions impact the bottom line and every employee in the business. I used to refer to it as “machinegun decision making”. The process of decision making is dependent on information and instinct. Kanneman

In a typical day one cannot remain in the “decision mode” all day or you will flame out. I would build diversions into my day. Times when the last thing I was thinking about was business. During these times I would “manage by walking around”. As I walked around I would still be faced with decision making, but at a lower level. Not all decisions are strategic! Some decisions were just my validation of a decision made by someone else.

I used the term “typically”. The truth is that no day was typical. One of the most called upon skills was that of time management. A CEO that can't manage his or her time, can't manage the business.

As Americans we are proud of the fact that we get to choose our government leaders. We may not always like the choices presented to us on the ballot, but we get to vote. Additionally, as American consumers in a free market economy, we’ve come to expect a lot of choices when it comes to products and services.

For example, which TV service do I use and then once it's hooked up, which channel will I watch? Do I want a regular coffee or a coffee drink? What should I wear to work? Which route do I take to get to work? Do I “like” a friend's post on Facebook? You get the idea. So one might wonder, just how many decisions do we make in a day? (You can decide if you want to keep reading.)

Thousands of choices every day

Researchers at Cornell University estimate we make 226.7 decisions each day on food alone. And as your level of responsibility increases, so does the multitude of choices you have to make. It’s estimated that the average adult makes about 35,000 remotely conscious decisions each day. Each decision, of course, carries certain consequences with it that are both good and bad.

Our decision strategies

There are certain decision making styles and strategies that guide the process: 

• Impulsiveness — Leverage the first option you are gives and be done.

• Compliance — Choosing with the most pleasing, comfortable and popular option as it pertains to those impacted.

• Delegating — Not making the decision yourself, but pushing it off to trusted others.

• Avoidance/deflection — Either avoiding or ignoring decisions in an effort to avoid responsibility for their impact of just simply preventing them from overwhelming you

• Balancing — Weighing the factors involved, studying them and then using the information to render the best decision in the moment.

• Prioritizing and Reflecting — Putting the most energy, thought and effort into those decisions that will have the greatest impact.

The reality is, we utilize a combination of these decision-making strategies in order to cope with the sheer volume of decisions that must be made. And that decision-making strategy that is utilized is actually the first decision to be made.

ChatGPT below – 

Decision-making is a cornerstone of effective business leadership, critically shaping the direction and success of an organization. For business leaders, making informed and strategic decisions is vital to navigating the complexities of the market and sustaining competitive advantage.

Effective decision-making ensures that resources are allocated efficiently, opportunities are maximized, and risks are mitigated. It involves analyzing data, understanding market trends, and forecasting future scenarios to make choices that align with the company’s goals and vision. Leaders who excel in decision-making foster a culture of trust and accountability, empowering their teams to contribute to the process and share innovative ideas.

Furthermore, timely and decisive action can prevent minor issues from escalating into significant problems, preserving the organization’s stability and reputation. In times of crisis or uncertainty, strong decision-making capabilities enable leaders to steer their companies through challenges with resilience and adaptability.

In an era where business environments are rapidly evolving due to technological advancements and global interconnectedness, the ability to make sound decisions becomes even more crucial. Leaders must balance short-term gains with long-term sustainability, considering the broader impact on stakeholders, including employees, customers, and the community.

Ultimately, the effectiveness of a business leader is often measured by the quality of their decisions, making this skill an indispensable attribute for driving success and fostering growth.