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Think You're a Logical Decision-Maker? Think Again

Decision MakingDo you think of yourself as a rational thinker? Take pride in your ability to draw logical conclusions from premises and data? Think people who use dietary supplements and male enhancement products are idiots? Yeah, me too, on all counts.

Well, guess what? It turns out that my decision-making ability isn't as bullet proof as I once thought, and I'm willing to bet that yours isn't either. And that's a real problem because corporations and businesses count on their executives and managers to make timely and accurate decisions.

Unfortunately, many, if not most, of our decisions are based on inductive, not deductive reasoning. What's the difference? Deductive reasoning is when the conclusion necessarily follows from the premises. For example, "Our company makes smartphones, and Apple sells great smartphones in our target market, therefore Apple is key competitor." You can definitely base business decisions on that statement.

Inductive reasoning, on the other hand, allows for the possibility that the conclusion is false even though the premises are true. An example would be, "Our company makes wireless phones, and Apple makes great wireless phones, therefore Apple is a key competitor." Business decisions based on that statement are erroneous; if you make entry-level cell phones for emerging markets, Apple is not a key competitor.

We draw incorrect conclusions using inductive reasoning all the time. We also make generalizations based on inconclusive data points, which I guess is no reasoning at all. Business decisions based on either are risky, plain and simple. If managers identify and weigh the risk as part of the decision-making process, that's fine. But all too often, they don't.

What got me thinking about this was, of all things, gophers. The Tobaks have a huge gopher problem. They tunnel underground and eat the roots of plants, killing them.

We've actually bought and used three generations of a battery-powered product that you bury in the ground and it makes a noise that supposedly chases gophers away. It's a popular product with good reviews. Well, after years of continued gopher problems, we finally looked into it and learned from a local professor that there's reasonably conclusive scientific evidence that these products have no effect whatsoever. I mean none. It shocked the hell out of me.

But wait, there's more.

  • Institutional and retail investors alike bought into electric car-maker Tesla's IPO, to the tune of over $200 million, even though there'll be no profits for many years to come and the deal was full of red flags.
  • We're now facing a possible whooping cough epidemic because people are forgoing the vaccine for their children because of low-probability side effects and a connection with autism that, scientifically speaking, doesn't even exist.
  • Millions of smart people upgraded to Apple's new iPhone 4, only to find a serious reception problem. Why not just wait until it's been out for a while?
Based on my experience, CEOs, executives, even entrepreneurs are particularly susceptible to making bad business decisions based on highly suspect generalizations or inductive reasoning. High-risk mergers and acquisitions are particularly high on my list, but I can provide plenty of examples of marketing programs with no metrics, pet projects, and promoting yes-men who are known to sugarcoat the truth, among other examples.

Why do they do it? It really comes down to behaving like egotistical children who believe that the facts and logic either do not apply or should not apply to them. You can also call it narcissistic, egotistical, grandiose, or even a sense of entitlement, but it's all the same phenomenon. We're all susceptible, but successful people seem to be particularly so, although that's clearly inductive reasoning on my part, which I guess further demonstrates my point.

Well, even though the business world is rife with subjective decision-making, at least the scientific community uses the scientific method - a form of deductive reasoning - or we'd all still be living like the Flintstones, right? But wait a second, how about global warming? Uh oh, I think we've got a problem.

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