How to Make High-Risk Decisions

Last Updated May 7, 2011 7:37 PM EDT

How to Make High Risk DecisionsMost people think they'll never have to make high-risk decisions, mistakenly thinking that's why business and political leaders are paid the big bucks. Sure, it's in their job description, but it's not their sole domain.

Whether it's work related or about health, education, family business, or more personal matters, each and every one of us will have to make more high-risk decisions than we'd like. The good news is we can learn from those who do it for a living.

Now, I'm not going to sit here and tell you this stuff is easy. It's not. Not even for CEOs and presidents. There are, however, relatively well-defined methods and processes for achieving the highest probability of success while avoiding common pitfalls.

We all got a close-up look at high-risk decision making when President Obama gave the order to deploy U.S. Navy SEALS in a raid on a Pakistani compound suspected of housing Osama bin Laden. After studying the compound for months, CIA analysts were only 60 to 80 percent sure that bin Laden was actually there.

So pulling the trigger on the mission was a big risk for the president. He was risking the lives of American soldiers and a political backlash from Pakistan and other nations. Likewise, not pulling the trigger could have meant the escape of America's number one enemy.

Likewise, there are dozens of famous high-stakes, high-risk decisions of the past few years: the federal government bailout of the Big 3 automakers, Apple's decision to enter the crowded cellphone market, and Sprint's decision to merge with Nextel, to name just a few.

As a corporate executive and strategy consultant, I've been a part of high-risk decision making for decades. I've seen the variables, data, and probabilities analyzed a dozen different ways, but in all cases, there are three unassailable takeaways from the process:

  • It always comes down to a gut-level decision, but savvy leaders never make critical decisions on gut instinct alone; they're always well-informed.
  • The key to achieving the highest probability of success is to be aware of the major pitfalls and ask the right questions of the right people.
  • Once you make the decision, be prepared to accept the consequences, one way or the other. Oftentimes, you don't find out if you were right for some time.
In terms of asking the right questions of the right people, it's not as simple or straightforward as we might like it to be. Nevertheless, I've boiled it down to these ...

5 Things You Need to Know to Make High-Risk Decisions:

  1. The goal. What's the goal of the process and how do you know if you achieved it? Seriously, one of the major pitfalls of high-risk decision making, especially in the corporate world, is poorly defined goals and metrics or failing to have all major stakeholders in agreement.
  2. The data and the risks. Some of the information you need to gather is oddly counterintuitive. You need to at least try to predict both the upside and downside (risks) of choosing correctly, the same for choosing incorrectly, and you need to do that for each potential outcome. That's a 2x2x2 matrix if there are two possible outcomes, for those who are technically inclined.
  3. The odds. It's not good enough to ask, what are the odds of success or failure? It's more intricate than that. In the case of bin Laden, for example, you'd want to determine the odds that 1) the guy in the satellite images is him, 2) if it is him, the raid will be successful, 3) the intelligence will improve if we wait, etc. Lots of probabilities to assess.
  4. The pitfalls. Not much of this process is black and white, but the pitfalls are. That said, they're not always avoidable. In any case, it's always good to know what you're trying to avoid: 1) analysis paralysis; 2) making a quicker decision based on limited data than you absolutely have to; 3) being too emotionally close to the problem or the people to be objective; 4) letting your own "issues" or ego get in the way; or 5) not focusing on the problem at hand, i.e. what I call sound-bite or ADD decision-making.
  5. Who and what to ask. Most importantly, once all the analysis is done, good leaders will always do the same thing before making their decision, as should you: Ask the people whose judgment you trust, whose confidence you keep, who are in the best position to make the right decision, who've seen the same analysis you have - your top lieutenants, executives, advisors - what they would do if they were in your shoes. Don't let them hem and haw about it; get them to answer and look them in the eye when they do. Then, and only then, relax, take your time - as appropriate - and make your decision.
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Image: The White House