Think hard about your risk tolerance. When decisions involve uncertainties, the desired consequence may not be the one that actually results. A much-deliberated bone marrow transplant may or may not halt cancer. A low-risk investment in municipal bonds could result in major financial losses. People vary in their tolerance of such risks and, depending on the stakes involved, in the risk they will accept from one decision to the next. A conscious awareness of your willingness to accept risk will make your decision-making process smoother and more effective. It will help you to choose an alternative with the right level of risk for you.
Consider linked decisions. What you decide today could influence your choices tomorrow, and your goals for tomorrow should influence your choices today. Thus many important decisions are linked over time. A highway commissioner may decide to buy land now to create options for accommodating possible increases in traffic in the future. He thus circumvents potential jumps in land values or increases in community resistance which could foreclose future options. The key to dealing effectively with linked decisions is to isolate and resolve near-term issues while gathering the information needed to resolve those that will arise later. By sequencing your actions to fully exploit what you learn along the way, you will be doing your best, despite an uncertain world, to make smarter choices.
The eight PrOACT elements provide a framework that can profoundly redirect your decision making, enriching your possibilities and increasing your chances of finding a satisfying solution. Before discussing each element in the coming chapters, we’ll begin here with a brief and somewhat simplified case study that shows the PrOACT process at work.
APPLICATION
To Sell a Business or Not?
Many years ago, an acquaintance of ours who we’ll call Bill established a soundproofing business in Brooklyn, New York, with his friend Stan. It had the usual rocky start faced by most new businesses – getting it established required a lot of hard work – but after 20 tough years Bill and his partner were at last happy with where their company stood. It had grown; it was successful; and their key employees were skilled, loyal, and reliable. The unremitting stresses and strains of owning a small business had eased.
Bill, an active and restless man who liked challenge and change, now worried about becoming complacent and losing his edge. Taking a proactive look at his situation, he began to evaluate his needs and concluded that he wanted to sell his half of the company. He thought he might go on to launch a new business of some kind. He shared his thoughts with Stan, and Stan indicated a willingness to buy Bill out.
Then Bill started thinking about how to price his share of the business. He knew that the company was worth $1,300,000, giving his half a value of $650,000. But he felt that was much more than Stan could afford. He decided, tentatively, to set the price at $400,000. When he talked over his intentions with his wife, Marie, and their three grown children, however, they expressed considerable discomfort with the course he was considering. They remembered vividly, even if Bill himself didn’t, the grueling toll taken by the long hours and high stress of the early years spent establishing and building the company. Was he really ready to go through that again at age 57? And if he did sell, shouldn’t he get the full rewards of his labor—shouldn’t Stan have to pay the real price? As Bill listened to their arguments, he realized that he, too, was uncomfortable with the decision he was about to make. He sought our advice.
Our first priority was to help Bill formulate his decision problem clearly. Why sell? He was bored; he wanted a change. He planned, somewhat vaguely, to develop another business, location and type undecided. He also planned, again vaguely, to look into moving to the West Coast—the climate appealed to him, and he and Marie would have more opportunities to golf, sail, fish, ski, and pursue the other outdoor activities they loved.
Bill needed to give direction to his decision problem by assessing his objectives explicitly. How much did he really want the invigoration of a new physical environment and way of life? the intellectual challenge of gaining expertise in a new area? the mental and emotional effort of building a business from the ground up? With more focus and thought, Bill defined his primary objectives: participating in outdoor recreational activities, being challenged intellectually, and minimizing stress. He clearly valued loyalty to his partner as well, because he was willing to sacrifice to him a significant portion of his business equity.
We began next to look at alternatives. Bill had ruled out the status quo, but he had considered only one other option: selling out to his partner for $400,000. But even given his determination to sell, a higher price would better enable him to fulfill his objectives—he shouldn’t overlook that alternative. In addition, we helped Bill develop some other, more creative choices. He could get $650,000 by finding a buyer other than his partner. Or his partner could pay $400,000 immediately and $250,000 in installments over time. Or Bill and Stan could both sell, with Stan, if he wished, remaining to manage the business under the new ownership.
Bill’s new insight into his objectives led him to reflect more deeply on the consequences of this expanded, but still-limited range of alternatives. Had he considered the bite that capital gains taxes would take out of his investment capital? Would the remaining sum give him the flexibility to start over while maintaining the degree of leisure and comfort that he and Marie had come to enjoy? The financial picture for a sellout, given the tax situation, didn’t look as attractive as it once had.
We pressed Bill to consider the tradeoffs between his own financial well-being and his loyalty to his partner. We asked if, magically, his partner were somehow to come up with $650,000 to buy the business, would Bill turn around and write his partner a check for $250,000? He responded, naturally, with a resounding ‘‘No!’’
We also helped Bill think through the other tradeoffs inherent in his objectives. He wanted to enjoy outdoor life in a milder climate, but he wasn’t ready to retire. On the other hand, he didn’t want to go back to spending all his time working or worrying about work, either. He already had one grandchild, with another on the way, and he wanted to spend more time with them than he had been able to spend with their parents. Clearly, starting over with a new business would require significant personal sacrifices, not to mention the considerable risks and uncertainties of launching a new venture in a new market in a new place. Bill wasn’t afraid of uncertainty and risk—he was a businessman, after all—but this time around he wouldn’t be able to rely on Stan’s expertise and support. After an association of more than 20 years, he had come to value Stan’s perspective highly.
Armed with a full and fresh view of his decision problem, Bill thought further about the issues we had explored. He discussed his objectives and alternatives with his family and his partner. Bill’s ultimate smart choice, a complete reversal of his original plan, was not to sell out. Instead, he and his wife moved to southern California, where he established a branch of the soundproofing business. They enjoyed their new lifestyle, and Bill found it invigorating to build a new business almost— but not quite—from scratch. He did so well with the business, in fact, that when, eight years later, he was really ready to retire, his partner bought him out for $1.7 million.
Start Making Your Own Smart Choices Now
Bill’s experience illustrates the benefits of learning how to make good decisions. Of course, a good decision doesn’t necessarily guarantee a good result, just as a bad decision doesn’t necessarily guarantee a bad result. The careless can hit it lucky; the careful can be shot down. But a good decision does increase the odds of success and at the same time satisfies our very human desire to control the forces that affect our lives. In the chapters that follow, we will lay out, step by step, the PrOACT approach for decision making—the method that proved so valuable to Bill. Reading these chapters will enable you to improve the way you make the decisions that determine the course of your own life.
Before we plunge in, though, we want to review a couple of important tips that will he
lp ensure that you get the full benefits of our approach.
First and foremost, always focus your thinking where it matters most. Cycle quickly through the eight elements to gain a broad perspective on your decision problem. Typically, for all but the most complex decisions, you will not need to consider all the elements in depth. Usually, only one or two elements will emerge as the most critical for the decision at hand.
Sometimes, the simple act of setting out your problem, objectives, alternatives, consequences, and tradeoffs, as well as any uncertainties, risks, or linked decision factors, will fully clarify the decision, pointing the way to the smart choice. If not, you should try reconfiguring your problem in various ways. Display it graphically, as a table, diagram, or chart, for example. Restate it in several forms, using different words, phrasings, and emphasis. Describe your problem to others, asking for their opinions and advice. For Bill, imagining himself giving his partner $250,000 in cash was an eye-opener, as were his family’s recollections about the struggles and stresses of the past.
Although the systematic approach we prescribe will greatly increase the chances of reaching a smart choice—as it did with Bill—it doesn’t assure it. You must also avoid certain psychological traps that can derail your thinking. Psychologists have shown, for example, that the first ideas that come into our head when we start out to make a decision can have an undue impact on the ultimate choice we make. This can, without our even knowing it, distort our decision-making process and lead us to the wrong decision. In Chapter 10, we will show you how to identify and temper the impact of the most common psychological traps.
Bill’s story underscores one more important lesson about making smart choices: take control. Create your own decision opportunities. Be proactive in your decision making. Look for new ways to formulate your decision problem. Search actively for hidden objectives, new alternatives, unacknowledged consequences, and appropriate tradeoffs. Most importantly, be proactive in seeking decision opportunities that advance your long-range goals; your core values and beliefs; and the needs of your family, community, and employer. Take charge of your life by determining which decisions you’ll face and when you’ll face them. Don’t just sit back and watch what—good or bad—comes your way.
CHAPTER 2
Problem
YOU CAN MAKE A WELL-CONSIDERED, well-thought-out decision, but if you’ve started from the wrong place—with the wrong decision problem—you won’t have made the smart choice. The way you state your problem frames your decision. It determines the alternatives you consider and the way you evaluate them. Posing the right problem drives everything else.
You’re planning to move to a new city, and you need to find an unfurnished apartment to rent. So your decision problem seems straightforward: Which apartment should I choose? But is it really so simple? Maybe it would actually be in your best interest to rent a house, not an apartment. Or maybe you should put your belongings into short-term storage and rent a furnished apartment for a few months to learn more about the city before committing to a lease. Or maybe you should try to find someone who’s looking for a roommate. Or maybe you should just go ahead and buy a condo. In fact, maybe you shouldn’t move to that city at all.
How you pose a problem profoundly influences the course you choose. The decision you reach from ‘‘What city?’’ will be entirely different from the decision you reach from ‘‘Which apartment?’’. The way you state the problem therefore represents a crucial choice in its own right. Get it wrong and you’ll march out in the wrong direction. Get it right and you’ll be well on your way to where you really want to go. A good solution to a well-posed decision problem is almost always a smarter choice than an excellent solution to a poorly posed one.
Be Creative about Your Problem Definition
The greatest danger in formulating a decision problem is laziness. It’s easy to state the problem in the most obvious way, or in the way that first pops into your mind, or in the way it’s always been stated in the past. But the easy way isn’t necessarily the best way. To make sure you get the problem right, you need to get out of the box and think creatively.
Many years ago, a struggling West Coast port was reinvigorated because someone posed a decision problem creatively. Every three years, the powerful dock workers’ union negotiated a new contract with management. To avoid layoffs, the union had over the years demanded—and been granted—a slew of restrictive work rules. The rules had come to tie management’s hands, preventing the adoption of more efficient new technologies for loading and unloading ships. As a result, the port was losing business.
The management bargaining committee, entering a new round of contract negotiations, saw its problem as getting the union to relax some of the more obstructive rules, in exchange for increased wages and benefits. But then a committee member, a consultant from outside the industry, asked a bold question: ‘‘What could management afford to pay the union in a one-time settlement to have all the work rules dropped?’’ The negotiators had never thought of this possibility before, because the existing work rules had constrained their thinking.
The answer to ‘‘What could management afford?’’ depended, of course, on how the port would operate if freed from the work rules. A study, commissioned by the bargaining committee, concluded that the changes would be revolutionary and the savings enormous.
The upshot: the committee negotiated a generous buyout with the dock workers, eliminating the work rules for a price that, though considerable, represented only a fraction of the projected savings. During the years that followed, the port completely changed its mode of operation, adding, among other things, the ability to handle containerized cargo. The results were spectacular. Ship owners benefited—with ship turnaround times cut from days to hours, their ships became far more productive, and their costs plummeted. Consumers benefited, as perishable fruit from Hawaii became cheaper and more plentiful. And, as traffic at the port grew, the workers themselves benefited. More and better jobs became available on the docks.
It was a real breakthrough—all because someone had taken a fresh look at an apparently routine problem and posed it in a creative new way.
Turn Problems into Opportunities
Decision problems are called ‘‘problems’’ for a reason. Rarely, after all, do we make a decision for the fun of it. We make decisions because we have to deal with difficult or complicated circumstances. We’re in a quandary, we’re at a crossroads, we’re in trouble—and we need to find a way out. But problems aren’t always bad. In fact, by stating your problem creatively, you can often transform it into an opportunity, opening up attractive and useful new alternatives. As Albert Einstein said, ‘‘In the middle of difficulty lies opportunity.’’ No matter how bad a situation seems, ask yourself: What can I gain from this situation? What are the opportunities here?
U.S. manufacturing companies discovered the bright side of decision problems when they were forced by law to eliminate environmentally harmful materials from their operating processes. At first, the companies saw only the negatives—disruptions, higher costs, more paperwork. But then some of them began to see opportunities. Instead of viewing the problem in its narrow and obvious form—How can we get rid of the harmful materials?—they redefined it more broadly: How can we produce our product in the best and most efficient way? As a result, they made breakthroughs in their operations that have actually enabled them to have lower production costs without toxic materials than with them. By changing a problem into an opportunity, they gained an important advantage over their less-savvy competitors.
In this case, the law acted as a trigger. Every decision problem has a trigger—the initiating force behind it. Triggers take many forms. Your boss asks you to choose a new mailing-list software package. A chat with your spouse about ways to use your backyard gives you an idea about new lawn furniture. A friend’s heart attack makes you realize that it’s finally time to get in shape.
Most triggers come from others (your boss) or
from circumstances beyond your control (new regulations affecting your business). Because they’re imposed on you from the outside, you may not like the resulting decision problems. But there’s no law that says you have to wait for a decision to be forced on you. You can take the initiative. In fact, creating decision situations for yourself is a great way to create new opportunities before a problem even arises. You can, for example, review your career path on a regular basis, seeing if you want to move in a new direction. You don’t have to wait until you get a lousy raise or your employer runs into trouble or you get a new boss whom you don’t get along with. Be proactive. Seek decision opportunities everywhere.
Define the Decision Problem
So what’s the best method for defining—or redefining—your decision problem? Start by writing down your initial assessment of the basic problem, then question it, test it, hone it.
Ask what triggered this decision. Why am I even considering it? The trigger is a good place to start because it is your link to the essential problem. State the trigger as clearly as you can. Include
1.Your assumption of what the decision problem is.
We need new lawn furniture.
2.The triggering occasion.
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