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Decision-Making Warning Flag 1a – The Gambler’s Fallacy

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StrategyDriven Decision-Making Article | Decision-Making Warning Flag 1a - The Gambler's Fallacy“The Gambler’s Fallacy, also known as the Monte Carlo Fallacy, is the false belief that the probability of an event in a random sequence is dependent on preceding events, its probability increasing with each successive occasion on which it fails to occur.”

Gambler’s Fallacy
Wikipedia

Seated at a roulette table, a gambler must decide on what color to place his next bet, red or black. He knows there is a 50 percent chance of getting either red or black and that the first four spins of the wheel yielded all reds. The gambler reasons that because half of all spins should result in black and the first four were red, it is more likely the fifth spin of the roulette wheel will be black and places his bet. While his logic appears reasonable, the roulette player has just fallen victim to the Gambler’s Fallacy.[wcm_restrict plans=”25541, 25542, 25653″]

Circumstances like this one are not limited to gamblers; they plague executives and managers in the business world every day. Decision-makers are victimized by the Gambler’s Fallacy because, like all logic errors, it appears reasonable and typically justifies the desired course of action. Recognizing the Gambler’s Fallacy is therefore difficult but necessary.

The Gambler’s Fallacy logic error occurs when a decision-maker incorrectly believes the probability of an independent event is in some way influenced by preceding occurrences. In the roulette example, the player wrongly assumed the first four results would influence the outcome of the fifth spin. Prior to the five spins, the likelihood of spinning five consecutive reds is calculated as:

Underlying Facts:

  • Possible Outcomes: Red or Black
  • Outcome Distribution: Equal number of Red and Black opportunities
  • Probability of Spinning Red: 50 percent
  • Probability of Spinning Black: 50 percent

Calculations:

  • First Spin is Red: 50 percent
  • First and Second Spins are Red: (50 percent) x (50 percent) = 25 percent
  • First, Second, and Third Spins are Red: (50 percent) x (50 percent) x (50 percent) = 12.5 percent
  • First, Second, Third, and Fourth Spins are Red: (50 percent) x (50 percent) x (50 percent) x (50 percent) = 6.25 percent
  • First, Second, Third, Fourth, and Fifth Spins are Red: (50 percent) x (50 percent) x (50 percent) x (50 percent) x (50 percent) = 3.125 percent

Therefore, prior to the first spin of the roulette wheel the change of realizing a Red outcome five consecutive times is a mere 3.125 percent. However, because each spin is an independent event, not in any way influenced by the preceding outcomes, the chance of spinning Red on the fifth attempt having already spun four consecutive Reds is one in two or 50 percent. As long as the game is fair, it will always be 50 percent!

Recognizing the Gambler’s Fallacy

Logic errors are often difficult to recognize, the Gambler’s Fallacy being no exception. Questions decision-makers should consider in order to avoid the Gambler’s Fallacy include:

  • Was logic applied to support the desired decision option rather than independently identify the best option?
  • Has the decision’s logic been aggressively challenged, preferably by the team’s Devil’s Advocate or a disinterested third party?
  • Was an event’s outcome prediction influenced by preceding events, especially if the event occurs independently?
  • Was an event’s independence thoroughly assessed or naturally assumed?
  • Were the event’s independence and the probability of its outcome calculated by an individual or group having in-depth knowledge and experience of statistics?

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[/wcm_nonmember]Additional Information

Additional insight to the warning signs, causes, and results of logic errors can be found in the StrategyDriven website feature: Decision-Making Warning Flag 1 – Logic Fallacies Introduction.

Decision-Making Best Practice 19 – Identify the Decision Timeframe

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StrategyDriven Decision Making Article | Infinity Clock | Decision TimeframeEvery decision involves risk, with time underlying all mitigating factors. Some decisions occur too late, resulting in the forfeiture of a situational opportunity, competitive advantage, or adverse outcome avoidance. Other decisions are made too quickly, unnecessarily increasing risk because of diminished data gathering and contemplation that better informs the choice.[wcm_restrict plans=”49362, 25542, 25653″]

Key to minimizing the risk of any decision is selecting the best option within an appropriate timeframe. Defining this window of opportunity at the beginning of the decision-making process provides decision-makers with the maximum amount of time to formulate and select a course of action; increasing the probability of a quality choice thereby minimizing risk exposure.

Taking as Long as Possible to Make a Decision

Identifying the timeframe within which a decision should be made drives optimally informed choices. The maximum time limit serves to eliminate analysis paralysis whereby the decision maker endlessly gathers and analyzes information without ever coming to a conclusion. The minimum time limit reduces the number of uninformed reactionary decisions whereby the decision maker quickly selects an option without adequate information that might lead to a more suitable choice.

Identifying a Decision’s Timing

When identifying the timeframe within which a decision should be made, the following key considerations should be accounted for:

  • Identify when actions taken need to be effective (anchor date/time)
  • Determine the range of time after action implementation for the desired effects to be achieved
  • Estimate the range of time needed to implement selected actions
  • Quantify the amount of time typically required to organizationally communicate and initiate decision actions

The decision-making timeline can be calculated using these key estimates. Begin with the anchor date/time and subtract from it the low and high time range value of each estimate. Taken together, the anchor date/time less all of the low time values represents the latest date/time the decision can be made while the anchor date/time less all of the high time values represents the earliest point in which the decision should be made. The difference between these two dates/times and the present date/time represents the amount of time to be dedicated to the decision-making process.

Final Thought…

In order for this practice to be effective, a good faith effort must be given to making accurate time and time range estimates. These estimates should not serve as justification for what would otherwise be the embodiment of ‘analysis paralysis’ or ‘knee jerk’ decision-making.

StrategyDriven Contributors find beta distribution time estimates help improve accuracy and narrowness of time ranges. Such estimates are calculated as the quantity of the sum of the shortest amount of time needed to take an action plus the longest amount of time needed to take an action plus four times the best estimate amount of time needed to take an action divided by six.

(Shortest Time + Longest Time + 4*Best Estimate Time) / 6

Simply add and subtract five or ten percent from this value to obtain an estimated time range.[/wcm_restrict][wcm_nonmember plans=”49362, 25542, 25653″]

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Decision-Making Best Practice 18 – Dealing with Assumptions

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StrategyDriven Decision Making ArticleAll choices require the decision-maker to deal with a degree of uncertainty and ambiguity. Many times the information needed to make the highest quality decision simply does not exist, is unavailable to the decision-maker, or cannot be identified within the decision’s needed timeframe. Consequently, these information gaps are filled with assumptions – the best educated guesses of the decision-maker and his or her team – in order to allow the decision-making process to move forward. These assumptions necessarily contribute to the uncertainty surrounding the decision and therefore must be treated carefully.[wcm_restrict plans=”49356, 25542, 25653″]

Using assumptions in decision-making is not necessarily wrong or inappropriate. Some information is simply not attainable, does not add enough value to be worth its acquisition cost, or is simply unknown. Therefore, assumptions play an important role in decision-making. That said, there are several steps leaders should be taken when using assumptions in decision-making to help minimize the uncertainty risk created and/or eliminate that risk during the decision’s execution. These include:

  1. Document all assumptions, including the basis under which they are made
  2. Validate the basis of assumptions to the maximum extent possible using highly respected data sources and expert opinions
  3. Define underlying assumption basis using multiple data sources so to triangulate on the quantity to be used and its uncertainty range
  4. Establish a protocol for periodically checking the underlying assumption basis such that assumptions can be refined if contradictory or additional information is obtained
  5. For high value information, continue to pursue acquisition of the data and replace the assumption(s) once that data is acquired; refining the decision and execution strategy as required
  6. Establish a plus / minus range around assumed quantities and evaluate decision options based on how in range changes to assumptions impact each alternative
  7. Prepare decision contingencies based on possible changes to the assumptions in either the plus or minus direction. These should be triggered at predefined points based on the ongoing basis monitoring previously discussed
  8. Once the decision is made and executed, follow-up by evaluating and documenting the legitimacy of assumptions used such that they can be used again in future decisions including business case development

The central purpose of these actions is to first ensure the assumptions used are valid and remain valid so the decision itself and the actions taken result in the desired outcomes. Second, that when assumptions are later found to be inaccurate, prompt action is taken to adjust the course of action and ensure desired outcomes are attained. Third, that validated assumptions are carried forward to be used in future decisions such that the validation work is not wasted.[/wcm_restrict][wcm_nonmember plans=”49356, 25542, 25653″]

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Decision-Making Best Practice 17 – Informal Advisors

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StrategyDriven Decision Making ArticleDecision-making always possesses an element of uncertainty. And as the complexity of a decision increases, so does the risk of miscommunication, execution error, unanticipated conditions, and unintended consequences. StrategyDriven encourages the employment of a devil’s advocate to help mitigate such risks. (See StrategyDriven‘s best practice article – advocatus diaboli, The Devil’s Advocate and listen to the StrategyDriven Podcast – The Devil’s Advocate.) Unfortunately, even the staunchest contrarian may operate from an experience base closely aligned to the decision-making team; limiting the span of his or her challenges. Consequently, another mechanism is needed to provide the decision-maker with the complete set of challenges to his or her choices.[wcm_restrict plans=”49346, 25542, 25653″]

Informal advisors represent trusted, highly regarded and knowledgeable individuals with whom the decision-maker can vet her or her choices. In many cases, these individuals do not operate within the decision-makers inner circle of technical advisors but are instead personal advisors and confidants. These are the people leaders commonly ‘bounces ideas off of;’ who provide insight and ask invaluable questions that challenge the leader’s thinking in a way that reveals the strengths and weaknesses of a chosen course of action.

Role of Informal Advisors

Informal advisors serve many functions in the decision-making process, some of which include:

  • Reinforce mission alignment. Informal advisors question the decision-maker as to whether the chosen course of action reinforces the company’s chose direction and goals or if it simply an expedient course of action that could have adverse ramifications in the future.
  • Moral and ethical guide. These individuals challenge the decision-maker to test the selected course of action against the values of the organization and society; often revealing whether or not the decision will be well received by shareholders, employees, regulators, and the public.
  • The decision-maker’s conscious. Informal advisors tend to be personally close to the decision-maker. Therefore, they understand the person’s character and moral fiber. In addition to challenging whether the decision meets the organization’s mission and values, they test for whether the decision is consistent with the character of the decision-maker who ultimately sets the tone for the organization’s behavior.
  • Decision clarity. Personal advisors are typically not as steeped in the technical issues related to the decision as are the organization’s managers and staff. These advisors can therefore readily indicate whether the leader’s decision communications are clear and concise – whether the are understandable – and can provide feedback as to how the decision might be perceived by organization members based on the way in which the choice is being communicated. Such feedback affords the decision-maker to correct communications, as necessary, to minimize misperceptions.
  • Outside perspective. Many times informal advisors are leaders from other companies and possibly other industries. Their background, while not technically rooted in the issues facing the decision-maker’s organization, may have strong parallels as they may have encountered similar decisions the details of which are unknown to the organization’s decision-making team. Such advisors provide a broader perspective, bringing ideas, new concepts, and lessons learned from outside of the organization that can be beneficial in shaping the final decision and implementation approach.

Final Thought…

As an organization leader, it is not only important to have one or more informal advisors, it is equally important to reciprocate and to be an informal advisor to trusted friends and colleagues. In addition to making the leader’s decisions more robust, it helps these individuals grow their knowledge, experience, and perceptions beyond that which they would otherwise be limited to by dealing only with the challenges of their own organization.[/wcm_restrict][wcm_nonmember plans=”49346, 25542, 25653″]

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The Transformative CEO

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The Transformative CEO: Impact Lessons from Industry Game Changes

by Jeffrey J. Fox and Robert Reiss

About the Reference

The Transformative CEO by Jeffrey J. Fox and Robert Reiss identifies a number of common personal qualities and approaches taken by celebrity CEOs in building or turning around their companies. Jeffrey and Robert then breakdown these items into supporting subparts and provides a series of quotes from notable CEOs in support of each subpart.

Specific topics covered by The Transformative CEO include:

  • Turning around a company
  • Building superior customer service
  • Thinking big and going global
  • Performing while transforming
  • Having a higher purpose
  • Innovating and making everything better

Why You Should Not Buy This Book

StrategyDriven Contributors found The Transformative CEO to be shallow and largely uninsightful. While the book does provide some overarching characteristics and approaches of successful chief executives, we found many of these items to be common sense truisms, philosophies most junior managers and graduate level business students would stipulate. That renown CEOs agree with these premises serves to give them credibility but does little to suggest how the reader should implement the recommended approaches.

The book suggests actions to improve the management decision-making process. Surprisingly, these actions – the most valuable and explicit points made in the book – are largely unsupported by CEO comments.

Alternative Recommendation

StrategyDriven Contributors believe there are certain qualities, characteristics, and approaches common among successful CEOs. Furthermore, we believe CEOs set the tone and tenor of the organization over which they preside and so embodying these traits is important.

We recommend The Effective Executive: The Definitive Guide to Getting the Right Things Done by Peter F. Drucker as a superior resource for learning about the admirable qualities of an executive. Through his book, Dr. Drucker provides readers with the specific actionable steps necessary to become more effective as leaders through improved decision-making and action.

Click here to read our review of The Effective Executive.