The Ronald Problem: Evaluating Key Drivers of a Decision
Consider this scenario:
Ronald is either a librarian or a salesman.
His personality can best be described as retiring. There is no doubt that he is an introvert.
Is Ronald more likely a librarian or a salesman?
At first glance, most of us might assume Ronald leans toward being a librarian. After all, many salespeople are known for their outgoing and gregarious nature, seemingly incompatible with introversion. But let’s add some context:
- There are approximately 150,000 librarians in the US.
- There are a staggering 5,800,000 salespeople in the US.
This information should give us pause. Even if only 3 out of every 100 salespeople are introverts, there are more introverted salespeople than librarians. Did you consider this statistical fact before forming your initial opinion? Chances are, like most people, you did not. This is a classic example of Base-Rate Neglect, a Decision Trap where we focus on specific information while ignoring broader statistical data.
As Daniel Kahneman eloquently states in his book “Thinking, Fast and Slow”:
“The confidence that individuals have in their beliefs depends mostly on the quality of the story they can tell about what they see, even if they see little. We often fail to allow for the possibility that evidence that should be critical to our judgment is missing.”
How Does This Affect Decision-Making?
Now, how does this relate to decision-making in our everyday lives? In the Decision-Making Framework (DMF), Step 2 involves identifying creative alternatives, while Step 3 involves pinpointing the Key Drivers that can determine the success or failure of each alternative. Awareness of our tendency to neglect base-rate data is crucial, as it can lead us to overlook essential information that aids in estimating the likelihood of success or failure.
Tools and Tips for Avoiding Decision Traps when Identifying Key Drivers
#1 Cause Maps for Clarity
Our brains often gloss over statistical information and favor correlation over causation. To circumvent this Decision Trap, consider creating a cause map for each alternative you’re exploring. A cause map visually illustrates the cause-and-effect relationships involved, helping your team identify all variables that may affect the decision’s outcome. An example of a generic cause map that might apply to a manufacturing company follows.
#2 Sensitivity Analysis for Uncertainty
Sometimes, we must make decisions in the face of uncertainty about base-rate data. Here, sensitivity analysis becomes invaluable. It helps us gauge the impact of a change in a Key Driver on the overall decision outcome. By analyzing sensitivity graphs, you can prioritize your analysis efforts effectively.
For instance, in the sensitivity graphs below, we can see that a 1% change in the incremental margin affects the project’s expected Net Present Value (NPV) by >$17MM. In comparison, a 1% change in electric expense only has a $300K impact on NPV. Based on that information, we need to spend much more time understanding what can change the incremental margin than we spend analyzing the electric expense.
#3 The 80/20 Rule: Focus on What Matters
Remember the 80/20 rule: 80% of the outcome usually depends on 20% of the Key Drivers. After conducting a sensitivity analysis, identify those few Key Drivers that can genuinely make or break your decision. This simplifies your efforts as you move into Step 4 of the DMF, “Manage the Risks and Upsides,” which we will discuss in a future article.
In conclusion, understanding the hidden factors that drive decision-making can significantly enhance the quality of your choices. By recognizing Decision Traps like Base-Rate Neglect and applying tools and tips to identify Key Drivers, you can navigate the complex landscape of decisions with greater precision and confidence. So, the next time you’re faced with a tough choice, remember: it’s not just about the obvious details but also the hidden ones that truly matter.
Learn More About Decision-Making Framework
Are you interested in enhancing your team’s decision-making abilities in the face of complexity and uncertainty? You can watch our webinar, where we provide an overview of the Decision-Making Framework, explore common decision traps, and share best practices.
Let’s Discuss Strategies for Empowering Your Team
Would you like to delve deeper into strategies for empowering your team to make better decisions? You can use this link to schedule a conversation with us. There’s no cost involved.
By recognizing and actively addressing the Anchoring Trap, you can foster a more creative, open, and effective decision-making process within your team.
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Chris Seifert is the founder of Enabling Empowerment and an operations leader with 25+ years of experience managing high-risk, complex manufacturing operations and advising senior executives on strategy, leadership, culture, and execution. Most recently, Chris led Enviva Biomass’s manufacturing operations, first as VP HSEQ and then VP Operations, during a 6-year period in which revenue grew from $450MM to >$1B, plant production increased by >200% through commissioning new assets, integrating acquisitions, and organic growth, while reducing safety incident rates by more than 85% and growing adjusted EBITDA by >250%. As a Partner at Wilson Perumal and Company, Chris founded and grew an Operational Excellence Consulting Practice and became recognized internationally as a leading expert on Operational Excellence (OE), Operational Discipline (OD), and Operational Excellence Management Systems (OEMS). Chris has also served as a Plant Manager for Georgia Pacific and Owens-Corning and as a Supply Officer in the US Navy Nuclear Submarine Force.
