How to decide effectively

Effective and strong decision-making skills, both at work and in personal life, can be learnt only through practice, but there are rules that can help you avoid mental pitfalls. Michael J. Mauboussin, Chief Investment Strategist at Legg Mason Capital Management, and Adjunct Professor of Finance at Columbia Business School, talks about these rules in his recent book, Think Twice—Harnessing the Power of Counterintuition, published by Harvard Business Press.

According to him, the first step towards making better decisions is to think about the problems and issues clearly. Raise your awareness about the situation you are in. Research has shown that if it is explained to people how they might go wrong with a problem before they decide, they do much better in terms of taking a decision. It applies to the best of minds.

"It is particularly surprising that some of the biggest mistakes are made by people who are, by objective standards, very intelligent," says Mauboussin. To buttress his point, Mauboussin cites the example of Stephen Greenspan, the renowned author of Annals of Gullibility: Why we get Duped and How to Avoid it. Greenspan offered expert advice on becoming less gullible, but lost 30 per cent of his savings in the Ponzi scheme run by Bernard Madoff.

Of course, not every decision requires to be thought through; stakes are low in a large majority of decisions taken everyday. "Using a specific process comes in handy when stakes are high and when your natural decision-making process leads you to a suboptimal choice," Mauboussin says.

An important part of this process is a simple, inexpensive technique—a decisionmaking journal. Whenever you make an important decision, take a moment to write down what you have decided, how you have arrived at the decision and what you expect will happen as a consequence. Keep a checklist, too. This will help you think of the aspects that you might have inadvertently overlooked. Suggests Mauboussin: "A good checklist balances two opposing objectives. It should be general enough to allow for varying conditions, yet specific enough to guide action.

Finding this balance means a checklist should not be too long; ideally you should be able to fit it on one or two pages." While you are at it, watch for the possible sources of failure. Psychologist Gary Klein calls this process a "pre-mortem", which occurs before a decision is made. "One assumes that he is in future and that the decision has failed. You then give plausible reasons for your failure," says Mauboussin.

THINK SHARP

• Single out the objective of your decision.
• Prepare. Gather information about all aspects.
• Look at the outcomes that you are required to achieve.
• Thrash out all alternatives. Make a list of these options.
• Assess each option against the outcomes listed.
• Ascertain the best option.
• Apply your decision into action and execution.
• Evaluate the outcome of your decision to further hone your decision-making skills.