How To Make Decisions In Conditions Of Uncertainty

Decision-making is complicated by uncertainty, which is an inherent part of every business. More often than not, business owners find themselves in a situation under which they must take a call without knowing fully well the consequences of the decision they are about to make. For example, a shopkeeper has to think about how much inventory would be needed to meet the demand when he has very little idea about the demand from the market. Similarly, a manager has to hire new hands in anticipation of more work without knowing whether new work will come his way or not. Uncertainty, therefore, rules every aspect of business. And if you want to run a business successfully, you must learn the art of making decisions in uncertain conditions.

Having run a successful startup myself for a few years, I can say that it becomes easier with time and experience, but only if you learn the right lessons. Let me tell you, from my experience, what the potential pitfalls are when making decisions in an uncertain environment. We’ll then talk briefly about how Elon Musk, the co-founder of Tesla and SpaceX and perhaps the most iconic business leader of our time, deals with such situations.

The Four Pitfalls You Must Avoid

1) Overconfidence

When making decisions, we think that we know everything that could go wrong if things don’t work out the way we have planned them to. But it would help if you remembered that your decisions don’t work in a vacuum. Anything you do is influenced by multiple parties, including those who may have competing interests. As Maurice Schweitzer, Cecilia Yen Koo Professor at the Wharton School of the University of Pennsylvania says, “When multiple players, components, and steps are involved, uncertainty rises.” No one knows how a decision may pan out once things are out of their control. This brings me to the necessity of historical experience.

2) Historical experience

Experience is your only friend in an uncertain situation. Both good and bad experiences shape our decision-making, and any attempt to discount historical experience while taking a call on tricky issues may handicap you right from the start and set you up for failure. Going back to historical experiences while making a decision can remind you of the lessons you had learned at the time. With our attention spans becoming shorter with every passing day, it is always helpful to stop, go back to the basics, and be guided by our own experience.

3) Risk aversion

If you think of it, risk aversion sounds like good business advice. But trust me, it isn’t. Consider this, for example: your company is on the cusp of making a groundbreaking innovation, but it involves a substantial investment, and you’re not sure about the outcomes. Would you drop the idea? Don’t, I’d say, because managing risk is a better strategy than avoiding risk altogether.

It was not for nothing that the highly revered Austrian-American management consultant and the author of the book ‘The Effective Executive’ Peter Drucker once said, “Whenever you see a successful business, someone once made a courageous decision.”

4) Delay

While rushing through a decision is a bad strategy, delaying it is worse. The only thing delaying a decision does is add more uncertainty, which has bad consequences for your business. You don’t want to be in limbo for long, do you? In one of his recent letters to shareholders, Amazon founder Jeff Bezos outlined the importance of making “high-velocity decisions.” He said Amazon was “determined to keep our decision-making velocity high. Speed matters in business – plus a high-velocity decision making environment is more fun too.”

The One Advice You Must Imbibe

Who better than Elon Musk to learn decision-making from? Managing uncertainty has been his forte. He has aced it with SpaceX, which was like shooting an arrow in the dark, both figuratively and metaphorically. Over the years, he has evolved a system of decision making, which he says is a “scientific method” and “really helpful for figuring out the tricky things”.

Step 1: Ask the question that is troubling you about the decision.

Step 2: Collect the evidence which can potentially answer it.

Spet 3: Derive hypotheses based on the evidence you have collected. Then, as Musk says, “try to assign a probability of truth to each one.”

Step 4: Analyze the axioms and ask yourself, “Are these axioms correct, are they relevant, do they necessarily lead to this conclusion, and with what probability?”.

Step 5: Try to disprove the conclusion you have reached in response to the question above. You can also ask others to refute your conclusion to help break it down further.

Step 6: If no one is able to invalidate your conclusion, you have your answer.

As you see, asking the first question is important. It is for this reason that the process of decision-making looks so much like a series of questions and answers.

Once you believe that you can cut through the clutter of uncertainty and reach a conclusion, you’re set to go. Of course, you may not be able to implement the Elom Musk method of decision-making in one go. He has advice for you: try again.

Read more incredible stories on disrupt magazine here