We all know that hindsight is 20/20; the trick is to develop the kind of foresight that makes hindsight less painful. Every day, we make decisions. Some of them are big, like choosing a life partner or starting a business. Some of them are small, like whether to have fruit or a donut for breakfast. Even small decisions, compounded over time, can have significant consequences.
It’s easy to become overwhelmed with the options before us. That’s why so many businesses have turned to big data. Data-driven decision-making has yielded measurable improvements in revenues and expenses. In one recent Wall Street Journal article, MIT professors describe a study in which they found that data-driven companies have 4% higher productivity and 6% higher profits than average.
Implementing a data-driven strategy sounds simple. While it makes a lot of sense to make decisions based on trends and research, it can get tricky in reality. Every day, humanity generates 2.5 quintillion bytes of data. The sheer volume of information can be daunting, which is one reason 84% of enterprises have launched advanced analytics and big data initiatives. This requires setting up an IT infrastructure, implementing market intelligence software, and bringing on the data analysts and other staff to be able to mine petabytes of data to find the gold nuggets. Statista is predicting the global big data market will reach $103 billion in 2027.
Even with the funding, infrastructure, and staff to produce new dashboards around the clock, the overwhelming quantity of data created each day means that there isn’t always time to transform it into useful knowledge.
Many entrepreneurs will be familiar with a scenario Patrick Collison describes as the “dissatisfying uncertainty.” You have a highly consequential decision with unknowns, and the information is available, but you don’t have the time or resources to obtain it. The good news is that the busiest, most cash-strapped among us can leverage the principles below to achieve some of the benefits of quality decision-making.
Following trends in your industry is an obvious starting point. However, following trends outside of your industry can offer valuable perspectives when decision-making. This is especially important for entrepreneurs. Trends in technology, politics, foreign markets, scientific research, pop culture, and economics can have ripple effects across a vast spectrum of industries.
Following the news, reading relevant blogs, and tracking data across industries can be time-consuming, but there is a simple hack: get social. Making friends with people who are bringing their A-game both in your industry and other industries can have huge benefits. The right contacts will curate and share valuable insights and help inform your decision-making. Try to make time to have lunch with someone interesting once a week, and make sure it’s not just the same five people you have in your inner circle – reach out to other contacts you respect both in and outside your industry. You never know when someone will have information that can help you along your journey. Follow them on social media whenever possible and don’t be afraid to join Facebook & LinkedIn groups to help you network.
Ultimately, even with the best social network around, your most significant source of data is your own. If you’re making a big decision and you want to make the best use of your data, take some time to track important time series in a spreadsheet so you can really see the trends. Time series charts are especially easy to create and useful in making important decisions. Real estate is one relatable example: You can plot median home prices on a time series chart by month and easily identify pricing trends and potentially determine the best month to buy or sell.
Time series charts are generally helpful with any time-bound business decision, such as when to enter into a specific market, currency exchange opportunities, seasonal menu design, or which items to feature in retail displays. Using your social network to anticipate “the next big thing” and time-series data to identify trends will provide a balanced context for making decisions.
Acknowledge Your Biases
Acknowledge your bias. Objectivity is the golden standard when it comes to decision-making, but that requires a new level of self-awareness. Next time you’re debating which road to take, take a second to ask yourself if you’re demonstrating any of the following biases that could influence your decision:
- Confirmation Bias – Humans tend to favor evidence that reaffirms the beliefs they already hold, right or wrong, while dismissing evidence to the contrary. The next time you’re making a big decision, take a moment to acknowledge your confirmation bias and then monitor yourself for how it influences your choice. Acknowledging our biases doesn’t mean ignoring intuition – it makes us more empathetic to other viewpoints.
- Cognitive Inertia – The inability to adapt to new circumstances and sticking to old beliefs despite data suggesting otherwise can be disastrous. Old habits die hard. We’ve all seen scenarios where people continue to do things that are no longer necessary or, in some cases, actually cause harm simply because “that’s how it’s always been done.” This bias is especially difficult to tame, but if you make repeat decisions on a regular basis, take a moment to reflect. Sometimes, bringing a new person into the decision-making team can help to identify issues weighed down by cognitive inertia.
- Groupthink – The desire to be part of the group by siding with the majority, regardless of evidence or motives to support, is inherently human. Luckily, entrepreneurs are often comfortable swimming against the current. Even as stubbornly independent as many entrepreneurs are, within their tribe there can be a tendency to align with the rest of the group. Creating a culture that embraces conflict can help avoid groupthink. Another tip is to subscribe to opposing viewpoints. This could range from listening to podcasts you would normally avoid, to following Facebook pages and Twitter profiles that challenge your views.
- Optimism Bias – Making decisions based on the belief that the future will be much better than the past can lead to taking big gambles on low odds. Optimism bias can be seen in economic patterns over and over again – the dot-com bubble, the real estate bubble, cryptocurrencies. The stock market tends to believe that things will continue to improve and growth is unbounded. This is not a truism, so take the time to second guess any decision that sounds too good to be true.
Got a big decision and no time for deep analysis? You can leverage these mental models to help reach a solid conclusion at breakneck speed:
- Redundancy – Plan B, exit strategy, backup plan… call it what you will, this decision-making system has been a reliable fail-safe for centuries. We see this in everything from rock climbing to investing. The general idea is to have multiple fail-safes to enable you to take risks while ensuring that there is a net to catch you if you fall. In rock climbing, it is standard practice to have multiple anchors in case one anchor fails. When investing, financial advisors recommend allocating a portion of your savings in high-risk, high-potential investments and the remaining portion of your funds in the traditionally low-yield but stable investments. Any time you can have a net to catch your fall, it is a good idea.
- Bayesian Updating – It sounds complicated, but it’s just a matter of updating the probabilities of possible outcomes as you obtain new information. Data celebrity Nate Silver explains it like this: The first time you see a sunrise, you don’t know if it’s a random occurrence or a consistent phenomenon. However, every day you see the sunrise, you become more convinced of the likelihood that it will happen again tomorrow. Bayesian updating is just mapping out the historical trends, factoring in any new information, and then projecting the likelihood of the future trend.
- Pareto Principle – Often known as the 80/20 rule, this is the concept that 80% of the effect comes from 20% of the causes. In practical application, this means that 80% of your revenue comes from 20% of your customers and 80% of the work comes from 20% of your employees. When making decisions about resource allocation, it is essential to keep the Pareto Principle in mind. Time for bonuses? Think about who your top performers are and reward them with 80% of the perks. Need to identify your key markets strategically? Think about the clients who provide the bulk of your profits rather than the “average customer.” This will help you tailor your offering to your best customers rather than the midpoint.
Ultimately, knowledge is power. If you have the time and resources to dig into your data, develop a social network, and follow trends and create dashboards, then you’ll reap the benefits of data-driven decision-making in the form of higher profits and productivity. Charlie Munger, famed investor and speaker, shared his approach in a speech at USC Business school in 1994:
Personally, I’ve gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things – which by and large are useful, but which often misfunction.
One approach is rationality – the way you’d work out a bridge problem: by evaluating the real interests, the real probabilities and so forth. And the other is to evaluate the psychological factors that cause subconscious conclusions – many of which are wrong.
Developing your social network can help you establish the “real interests.” Data analysis will help you establish the probabilities. Knowing your bias will help you identify any subconscious conclusions. After this analysis, using the right mental model to make the decision will lead to the best possible outcomes.