You’ve heard that old saying, “Shoot first, ask questions later.” It describes a method of decision-making that emphasizes the importance of decisiveness over analysis, in a given situation. It is what I call “decision bias.” Obviously, when under threat or pressure, our instinct is to take fast action based on the information at hand.
In business, the question is, should we embrace or resist that instinct? Maybe I’ve been listening to too many podcasts on economics. You could argue, persuasively, that one podcast on economics is “too many”, and that I should stick to my beloved 80’s music. But, alas. One of the better speakers I heard talked about the concept of heuristics. A heuristic is easily defined as “a system of making decisions.” The point of a heuristic is to eliminate extraneous or unnecessary data and only focus on a relatively small subset of information that leads to a decision. For instance – now that summer is here, you may have already made a beach trip or two. That means you need sun protection. If you are kind of old, like me, you remember when sunscreen was “SPF 4” or maybe 8. Now, you probably use something like SPF 30, or 50, or 70, or 1,000…whatever. But in theory, the more UV blockage you have, the less vitamin D you get from sunlight. Your body needs vitamin D, too.
Actually, people have done scientific studies to determine how much less vitamin D you produce relative to the degree of SPF in the sunscreen you use. But, like you, I don’t want to read those scientific studies. Perhaps, if I knew all about it, I would decide to use a lower SPF sunscreen that would provide the optimal balance of UV protection and vitamin D production. But I don’t have time to know all about it, so I’ll just keep using SPF 50 because I don’t want to get skin cancer. In other words, I’ve heard all the information I need, and even though I know my conclusion is probably wrong, I can live with it. That’s a heuristic.
Ok, back to business. How many business decisions have you made, or will make in the future, based on a rough idea, a rule of thumb, an “industry standard?” Probably at least a few, and that’s okay. But how do you know those heuristics are good or bad? Which ones should you analyze? I recently challenged a client who was using a $65 per hour burden cost to analyze their job profitability. I asked, where does the $65 come from? They said, “it’s the industry standard.” I said, that’s great, but what if the industry standard makes no sense for your particular business? Is every business in your industry exactly the same – same number of employees, same pay scales, same employee benefits, same product mix, same fuel costs, etc.? That is unlikely.
So, we analyze – not because we want to waste time, but because we think it’s worthwhile to know whether this particular assumption of $65 per hour is useful, or if it should be changed. If we find the answer is really $50, then we change our heuristic. If we find that $65 was exactly correct, then we have confirmed its usefulness.
What assumptions would you like to challenge in your business today? Who have you talked to about this? Ask your trusted advisor.