A Counter-Intuitive Approach to Making Complex Decisions

Maarten Bos

Here is an excerpt from an article written by Maarten Bos and Amy Cuddy for the Harvard Business Review blog’s “The Conversation” series. To read the complete article, check out the wealth of free resources, and sign up for a subscription to HBR email alerts, please click here.

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When we heard that Barack Obama had chosen to sleep on his decision to authorize the raid that killed Osama bin Laden, we were pleasantly surprised. After all, “sleeping on it” is exactly what scientific research would prescribe when facing a complex decision, but it’s not often a path that leaders in high-pressure situations would take. Not surprisingly, perhaps, some pundits expressed outrage on Obama’s choice to press pause on the decision, calling him “feckless” and accusing him of “leaving advisors hanging.”

Amy Cuddy

Thankfully, few of us have to make decisions whether and how to kill terrorist leaders in our day jobs, but we all are faced regularly with complex situations that need our decisions. Oftentimes these situations are the ones we feel need a decision right away — either because of external pressures or because our “gut instinct” arrives quickly. But is sleeping on it the best way to make complex, high-impact decisions? Or is immediate decision making the best course for these situations?

In our experience as social psychologists studying human behavior and decision making, we think the evidence is clear: Sleeping on it was the scientifically sound decision for Obama and is the right course of action for anyone facing a challenging quandary. Maarten Bos, the co-author of this post, recently led an experiment that shed new light on the underlying mechanisms of why this is true — especially for complex decisions. The results were recently published in Journal of Consumer Psychology.

Bos and his co-authors found that during periods when the mind is “distracted” or not consciously focused on an issue (for instance during sleep), there is an active process that accurately weights the pros and cons of relevant decision attributes. Participants in the experiment were presented with information about cars. Some cars possessed many positive but irrelevant attributes, whereas others possessed fewer positive, but important attributes. Those participants who decided immediately chose the cars with many but unimportant attributes, whereas participants who were first given a task to distract them from the decision chose the quality cars. In short, sleeping on a decision allows us to differentiate between the vital and the irrelevant aspects, ultimately leading to higher quality decisions. Our unconscious can process large amounts of information — as long as we give it time to do so.

So, what is the best way to approach complex decisions? We recommend you do these three things:

[Here's the first. To read the complete article, please click here.]

1. Take in all information. Obviously, before you can make a decision, you need to have the information. We should use our conscious mind to gather and encode all the necessary facts pertaining to a decision. Usually, some options can already be discarded in this stage — options that clearly violate a “decision rule” for instance “this apartment costs twice as much as what I can afford.”

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Obviously, literally going to sleep isn’t always an option in the middle of the workday, but you can achieve a similar effect by going running, listening to music, or doing any other task that distracts you from the decision. After a period of distraction, one option usually feels better than the other(s). After you’ve gone through the three steps above, that’s the option you should choose.

So while the thorniest of problems naturally feel like the ones you should burn the midnight oil on until you’ve reached a decision, the science suggests a different approach — one that produces better decisions and better rested decision makers.

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Maarten Bos is a social psychologist and researcher at Radboud University in Nijmegen. He also owns a consultancy firm that advises organizations on ethical persuasion. Amy Cuddy is an assistant professor at Harvard Business School.

Leviathan on the Chicago South Side

In the brief account that follows, Sandeep Baliga provides a glimpse of life in the neighborhood in which I grew up. Although what follows resembles an “urban fable,” it seems true to life.

What lessons about justice and entrepreneurship does it suggest? Who or what is the Leviathan”?

You may wish to check out all of the material featured by the Cheap Talk website. Please click here.

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James is an alley-mechanic – he and his team of five workers repair cars in an alley behind a church on the South Side of Chicago. James rents the space from the church pastor for $50/day.   James has been doing business there for twenty years or so.  Then, along comes Carl, another alley mechanic.  He sets up a garage close to James.  Carl hires some homeless people to hand out flyers offering discounts to motorists arriving at James’ repair shop.

James is ticked, to put it mildly.  James thinks he has property rights to car repairs in the area – he pays $50/day for this right.  He asks the pastor to adjudicate. The pastor is well-known in the neighborhood and often acts as a mediator in contractual disputes. The pastor finds in favor of James.  But Carl is not from the neighborhood and does not acknowledge the pastor’s authority.  He continues to compete with James.

James turns to an informal court that has developed in the neighborhood.  The court arose to settle disputes between rival gangs but it grew to act as a general arbiter of contractual disagreements in the local underground economy. Again, the court finds in favor of James.  Again, Carl ignores the determination of the “court” as it has no authority over him.  Finally, the pastor is forced to use old-fashioned contract enforcement – violence.  He hires a gang of thugs to beat up Carl and his crew and drive them out.   End of story

(Source: Talk by Sudhir Venkatesh at the Harris School, University of Chicago)

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Sandeep Baliga is an Associate Professor of Managerial Economics at the Kellogg School of Management, Northwestern University.  He is a co-editor of the Berkeley Electronic Press Journal of Theoretical Economics.

 

How Not to Rip Off Your Customers

Joshua Gans

Here is an excerpt from an article written by Joshua Gans for the Harvard Business Review blog’s “The Conversation” series.

I especially appreciate Gans’s insatiable curiosity to consider unorthodox thinking and the insights only it can generate. Judge for yourself.

To read the complete article, check out the wealth of free resources, and sign up for a subscription to HBR email alerts, please click here.

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This post is part of Creating a Customer-Centered Organization.

The title of this post surely seems somewhat strange.

Surely any self-respecting business should be in the interest of making as much profit as possible, and the temptation might be to extract as much as you can from each customer interaction. But we know that such views can be too short-term. In many situations, while you could rip off a consumer when they first walk through your door, if you want them to come back, you need to them to be happy with the outcome — including getting “value for money.” This problem is as real for consumer-centric organizations as for corporations looking for opportunities to share value beyond their shareholders (as Michael Porter and Mark Kramer recently discussed in the pages of HBR).

Sharing value is perhaps a straightforward proposition when it comes to not dumping pollutants into the environment or skimping on product quality in ways that harm your customers’ health. But how does it work with regard to rip offs? That is, how exactly do you price so that you consumers feel happy and come back for more?

Northwestern University economist Jeff Ely addressed this question in a series of (somewhat technical) blog posts. Ely was concerned with situations in which some consumers value a firm’s product more than others, but the firm can only supply so many consumers. Which is to say, there isn’t enough product to go around, a classic rationing problem. Ely’s example used a popular restaurant, but it could apply equally to, say, a Broadway show. It could also apply to companies who launch new products to long queues (ahem, Apple) rather than pricing high to early adopters.

Firms do not usually consider having a scarce but desirable product a problem. Firms that want to make profit should run an auction and offer their product to the highest bidders. But as Ely pointed out, that means pitting your customers against one another with a result that those who actually get the product will pay a high price while others miss out entirely. In that situation, those who end up with the product might not be left with much value, and may feel ripped off, even though they chose what to pay. In the long run, the firm may face issues if they need to dip again into that customer pool. They clearly like the firm’s products but may have ill feelings about having paid so much. Perhaps this isn’t an issue for a Broadway show, whose customers tend to be one-offs, but for a local restaurant it is real.

One way to resolve this is to just set a price. If you really cared about the value consumers get, you’d price at cost and ration randomly amongst those willing to pay more than cost for your product. But for any firm, this is a heroic amount of sharing of value. Your consumers get as much as possible but you just cover costs.

You could charge more than cost, but this creates another dilemma. When there are lots of consumers with high values around, you’ll sell out. But what happens if those consumers aren’t there? Set a price and you are left with spare products. For a restaurant or concert venue, the extra seats do not paint a pretty picture.

Ely suggests that firms could deploy a hybrid between a price and an auction: hold an auction but cap the maximum bids that can be made. When demand is high, you’ll end up rationing but no one will be ripped off. But when demand is low, your price will effectively drop and you’ll still be able to sell out. You use the auction precisely when your consumers have power — so enable them to exercise that power.

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To read the complete article, please click here.

Joshua Gans is an economics professor at Melbourne Business School and a visiting researcher at Microsoft Research (New England). All views are his own. While writing this post in a café, the owner randomly gave him a free cookie.

The Worrying Trap: How to avoid it or escape from it

Thomas J. DeLong

Here is an excerpt from an article written by Thomas J. DeLong for the Harvard Business Review blog’s “The Conversation” series. To read the complete article, check out the wealth of free resources, and sign up for a subscription to HBR email alerts, please click here.

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I come from a family of worriers. We sometimes joke that at the next family reunion we should organize the seating chart according to which anti-anxiety or antidepressant medication each person is currently taking. There would, of course, also be a table for people who are self-medicating with substances not prescribed by a doctor.

What are we all worrying about? Perhaps the more accurate question is: What aren’t we worrying about?

We live and work in an age when there is plenty to fret about for professionals in every field and at every level. This worrying becomes a trap, however, when we start seeing doom and gloom everywhere, when it colors our decision-making and behaviors, when it causes us to go into a shell or always respond in the same tried-and-true ways to avoid catalyzing our worst fears. We all worry. But we often worry needlessly, excessively, and counterproductively. While a moderate amount of worry may focus the mind, too much diminishes effectiveness and robs us of our ability to move outside our comfort zone (because there is even more to worry about outside of that zone!).

Someone once said that there are no small worries for people with big ambition, since every obstacle on the road to goals looms large. Driven professionals often struggle to differentiate small worries from big ones, because every problem is given equal, exaggerated weight. Think about what work worries assault you in the middle of the night and prevent you from going back to sleep. There are three things that you can do to keep yourself from falling into the worry trap:

[Here's the first. To read the complete article, please click here.]

Evaluate the relative significance of the things you’re worrying about. Don’t give a disproportionate amount of worry to small problems. “Box up” your small worries so that they don’t spread. Make a conscious effort to confine your fears and anxieties to the subject at hand. Keep reminding yourself that a problem in one area does not necessarily mean that there’s a problem in another area. Stay focused on the specific issue.

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Thomas J. DeLong is the Philip J. Stomberg Professor of Management Practice in the Organizational Behavior area at Harvard Business School and the author of Flying Without a Net. His research focuses on the challenges facing individuals and organizations in the process of change.