From Annie Duke’s “How to Decide”
Why do I need this 6 step process?
“For new decisions, you’re looking into the future, which is inherently uncertain. This six-step process will help you improve the quality of both new decisions on your horizon and your assessment of past decisions. It’s hard to accurately assess a decision after the fact, in the shadow of an outcome that has already happened. But if you have a good decision process going forward, and keep a record of it, you’ll be a lot better off. You won’t have to wonder after the fact whether a decision was good or bad, under the haze of resulting and hindsight bias. Instead, you’ll be able to check your work.” (p. 68)
The 6 step process for better decision making.
“The six-step decision process gets you to imagine the possibilities, consider the payoffs associated with those possibilities, and estimate how likely each possibility is to occur. That’s why this framework helps you manage the time-accuracy trade-off, because it means you are thinking in terms of upside and downside potential.” (p. 150)
Step 1—Identify the reasonable set of possible outcomes.
- “Identifying the set of reasonable outcomes is a huge improvement over having particular outcomes distort your view (the actual outcome for past decisions, or prospective outcomes you especially desire or fear).” (p. 72)
- Create a Decision Tree.
- “Identify the reasonable set of possible outcomes. These outcomes can be general scenarios or be focused on particular aspects of the outcomes that you especially care about.” (p. 98) (See example below)
Step 2—Identify your preference for each outcome
- “So let’s start with explicitly adding information to the trees we have started developing by expressing the desirability of each of the reasonable ways a decision could turn out. The simplest way to do this is to list the potential outcomes on the tree in order of your most preferred to your least preferred.” (p. 72)
- “Identify your preference for each outcome, – to what degree do you like or dislike each outcome, given your values? These preferences will be driven by the payoffs associated with each outcome. Gains comprise the upside and losses comprise the downside. Include this information in your decision trees.” (p. 98)
- “Here’s an example of the tree for the Boston job, reorganized by preference, with the most desirable at the top and the least desirable at the bottom:” (p. 72)
- “For almost any decision you make, there are some outcomes you hope for and some you don’t. By explicitly adding preferences to the tree, you can see at a glance how many of the possible outcomes you like and how many you don’t. That’s why it’s helpful to order the possibilities by preference. Of course, just because a decision has mostly good or mostly bad outcomes isn’t enough to determine whether the decision is, correspondingly, good or bad. You also need to know the magnitude of each outcome—how good or how bad. In other words, you need to think about the size of your preference—the degree to which you like or dislike each of the possibilities.” (p. 76)
- “The most straightforward way to understand payoffs is for decisions where the quality of the outcome is measured in money. If you make an investment that earns you money, that’s a gain. If you lose money, well, that’s a loss. But payoffs can also be in the currency of anything you value, such as happiness (your own or that of others), time, social currency, self-improvement, self-esteem, goodwill, and health, etc.” (p. 76)
Step 3—Estimate the likelihood of each outcome unfolding.
- “You can start expressing probabilities by using common terms” (P. 97)
For example you can use terms like, “Rarely, unlikely, with low probability, possibly, likely, frequently, often, certainly, etc.” - After you give each outcome a term, you can convert these terms into probabilities. The combined percentages should add up to about 100%, but not more.
- “To figure out whether a decision is good or bad, you need to know not just the things that might reasonably happen and what could be gained or lost, but also the likelihood of each possibility unfolding. That means, to become a better decision-maker, you need to be willing to estimate those probabilities.” (p. 79)
- Here you can read how to assign probabilities.
Give each Potential Outcome and Likelihood.
Convert the Likelihood Terms into Percentages.
Step 4—Assess the relative likelihood of outcomes you like and dislike for the option under consideration.
Step 5—Repeat Steps 1–4 for other options under consideration.
For example, after you finished creating Candidate A’s Decision Tree, you can create Candidate B’s Decision Tree.
Here is Candidate B’s Decision Tree.
Step 6—Compare the options to one another.
Your goal is to find a candidate that will most likely stay with your company the longest. You can compare Candidate A’s decision tree with Candidate B’s decision tree.
Other good quotes.
“That’s part of why it’s so important to good decision-making to ask yourself about the possibilities, the payoffs, and the probabilities that the future will unfold in various ways. It forces you to assess what you know and seek out what you don’t.” (p. 94)