Important decisions are made slowly7 June, 2018
Ilya Panteleev, CEO of Intercomp, spoke to Timofei Kareba about two choice systems, the “black swans” of Taleb, and a sign that can be used to check out any choice.
You refer to two choice systems. Could you please describe them?
The idea of two “choice” systems — system 1 and system 2 — comes fr om the work of Daniel Kahneman who was awarded a Nobel Prize in Economics. References to the research on judgments and decision-making under uncertainty conducted by Kahneman and his colleagues can be found in the majority of the latest best-selling business books.
According to Kahneman, system 1 was used by very early humans. It boils down to instincts which, over thousands of years, have morphed into what we now call intuition. This is the ancient system of fast actions, i.e. fight or flight response: if it seems that a tiger is approaching, we run. And whether or not there is tiger is not relevant. Quick decisions: Yes – No. They save someone’s or another animal’s life.Making quick decisions requires practically no thinking. Choices are made intuitively. Driving a car is a good example here. For the most part, when we drive a car, we do so intuitively (provided there is no need to make a sharp turn or stop abruptly), and we can at the same time even talk to whomever is in the car with us. What is indicative of this intuitive and low-energy process is that after a while, when we arrive at our destination, we do not remember exactly what we were talking about and how we drove the car.
Are you not confusing “intuition” with “mechanicalness”?
According to Kahneman, they are one and the same.
What is the nature of system 2?
The second system is more deliberate and is basically cognitive decision-making. We use the second system when we start thinking and working things out. System 1 sorts through known patterns quickly and quickly plucks out a pattern similar to the situation we need to handle. System 2 examines and analyzes.
But sometimes people make decisions intuitively in unusual situations. They have no previous experience of the situation but, for some reason, they feel that they should act in a particular way.
If someone says: “I feel I should go there”, this means that this person has, consciously or unconsciously, found a known pattern and applied it. When we drift predictably along a path we know, we do not need to switch on our thought process. We act intuitively, change gear, brake, go right or left. If there is any thinking, then it’s intuitive like a reflex. And then suddenly we need to make an important decision because, for example, something unforeseen comes up on the road. The equivalent in business is to go or not go for a particular project. Accept or reject a specific offer. Buy or not buy a competitor’s company. Intuitive decisions do not work here because in these cases the situation is unprecedented and unique. Known patterns cannot be applied, or a pattern could seem to fit at first glance but only until we realize that it in fact does not.
Numerous studies show that our brains are lazy and “fill in” the gaps in our surroundings even with very little information. They always strive to find a pattern quickly even if it’s the least suitable, and they do not bother with analyses. We “intuitively” think that one candidate is better than another because of his frank gaze and strong-willed chin. That one shampoo is better than another because of its sturdier bottle. That a set of six whole plates costs more than a set of twelve of the same plates with two defective items and one smashed to smithereens. That more people die from cancer than respiratory infections. That, if a bat and a ball together cost one dollar and ten cents, and the bat is more expensive than the ball by one dollar, then the ball costs 10 cents. That Robert Downey Jr. is a better-paid actor than Mark Wahlberg as we hear about him more often and even remember that he has made more films. We make decisions hastily, intuitively and thereby make mistakes very often.
That’s precisely for this reason that it’s important in vital business situations to cut off intuitive thinking in order to make deliberate and informed decisions.
Are strategic decisions system 2 decisions?
Yes. And the matter of probability is what comes next. Decision-making clearly entails two outcomes: winning or losing. And when we make decisions, we use a certain set of tools. We can use either an intuitive or a cognitive set of tools. And you know what? Statistics as well as the research conducted by Kahneman and his colleagues show that the probability of winning is much higher when we use a cognitive set of tools.
I’ve been observing entrepreneurs for many years, and they predominantly tend to make important decisions intuitively.
Entrepreneurs are a separate topic. We’ve been talking about decision-making in general. There are no accurate statistics about the number of new businesses closing down, but the most often quoted figure is 90% within the first five years. On the one hand, as Mr. Taleb argues, a healthy capitalist society should see these entrepreneurs as heroes and soldiers because the current capitalist system (by analogy with the ecosystem wh ere weak specimens and entire species are dying giving way to stronger subjects more adapted to changing natural conditions) develops through their efforts and their invested money. But this particular state of affairs may stem from intuitive decision-making. If entrepreneurs made not only intuitive but also cognitive decisions when they set up their business, venture survival statistics would be much better.
I think this is the techie in you speaking. How do you yourself make decisions?
I try to follow the method I described. I try to avoid emotions when I make decisions as people make bad decisions when they are emotional. Thinking clearly and calmly works better for me. It makes sense to put aside intuitive decisions or consider them critically, crank up system 2 and take everything into account. Remember and consider similar options, ponder what happened then. Discuss issues with colleagues unrelated to our business, friends, people we trust. One piece of advice: important decisions should not be made quickly. It goes without saying that there will always be deadlines, there will always be people in a hurry, but if we rush an important decision that we make for us or for a company, this means that we have not applied system 2, the decision has not been thought through, and the probability of error is high.
What does quickly mean? If a new project is presented to you with a positive assessment, why not make a decision then?
I will by all means make a decision quickly in this case, but only if I see that the estimations are really correct, if I’m certain that the market, opportunities and resources have been assessed properly.This, of course, applies if we are talking about decisions that could greatly affect business.
There’s a very good way I particularly like to assess the risks, opportunities or feasibility of a project. Simply ask the following question to people who extol the project prospects: “Suppose we take on this project, but it turns out to be disastrous. Think for 2–3 minutes what this disastrous outcome could be, and why did it come about?” People then come up with quite interesting answers that help everyone in the team to understand the project weaknesses that need attention. This is important because improbable events, although unlikely, can still occur.
If you’ve been considering a moderate-margin project, but you see several major issues that could practically kill or seriously damage your business, there’s no point taking on such project. Highly improbable events or “black swans” according to Taleb occur more often than we think, and according to statistics, people pay little attention to them.
When you discuss a tricky decision with close people you trust, does the solution they suggest, their advice come from their intuitive thinking?
Very much so. But here it’s different. Here, we can get raw assessments because these people are not involved in our project.
Of course, they should have some understanding of business or of the matter discussed. They can point to things that were not considered, share ideas that give a broader picture and a different problem-solving approach. After all, leaning towards a certain decision, we often give more importance to the factors that confirm the correctness of our choice and rather recklessly cast aside inconsistencies as insignificant issues. Another perspective can make for a more balanced approach and a more logical and deliberate decision.
You said, I quote: “A great number of interesting conclusions and useful models spring up across applied sciences: economics, psychology and probability theory. It’s important to be on-trend here. This helps decision-making.” What does that mean to “be on-trend”?
Mathematics, psychology and economics – the essence of these three sciences – are at the heart of behavioral economics. A lot of interesting ideas can be drawn from there...
So it seems that you’re talking about choice and decision-making based on some contemporary variants.
No, I’m talking about something else. The fields I listed broaden views. There are standard management practices, standard marketing, pricing, and communication practices that were taught in business schools already 20 years ago and will continue to be taught. They make up a certain core knowledge, while new insights derived from behavioral economics greatly expand and refine our take on business and the world as a whole.
Classical economics proceed from the premise that people make decisions logically: seeking the greatest gain and avoiding unnecessary risks. But real life is much more complicated than this economic model. Our decisions are often unpredictably irrational. Understanding the reasons for the behavior of others is necessary for success and confers many practical benefits in everyday life. These are precisely the issues studied by behavioral economics which come up with a lot of surprising insights.
In the vast majority of cases, businessmen need to find unconventional and new solutions. Such unexpected decisions are very often called breakthroughs which sometimes bring about fantastic results. And sometimes big companies arise from one of those breakthroughs.
Absolutely. Let’s go back to the example of the 10% of surviving startups. I’m sure that two or three entrepreneurs among these surviving 10% are people who had a light bulb moment and eventually become the new Zuckerberg or Branson. Here, it’s about true talent, probability and persistence. A very good sign is if we’re ready to risk “our own skin” and invest our own money in a particular project. Are we ready to risk big so that it all really comes about?
Be ready to lose everything?
Exactly. People who had an epiphany that brought about great results and have built remarkable companies are undoubtedly talented. They’re also very lucky in many respects because they happened to be the first, second, third among these thousands who did not make it. They were so confident that they put everything in their endeavor. Such success is a big risk.
Certain correct rates are recommended for projects in business. Either you bank on moderate to low-risk projects with no “black swans” – and this is the foundation of your business – or you bet on high-risk projects with potentially a huge margin. If you take on both projects, then you are likely to be either reasonably or very successful.
Can you remember an important decision you made and tell us how you made it?
As CEO of consulting companies I had to make quite a lot of important decisions. Sometimes I got it wrong, and this happened when the future project plan had not been assessed properly. But I no longer make this mistake now. We work in outsourcing, system integration in very specific markets wh ere clients have the opportunity to choose. An error is a high price to pay.
Which latest business decisions do you consider particularly interesting and bold?
The merger of two IT consulting companies. This was a very interesting experience that does not arise often and for many. And this was, of course, a good decision.
Seven years ago, a group-wide proposal was made to merge two system integrators: a new and an established one. The objective of this merger was to offer more services. I had just become the CEO of both companies. The thing that needed to be addressed first was that two different cultures needed to be combined: the companies were different and based in different cities. One was commercially focused while the other was process-oriented. On the one hand, it was necessary to create the right culture based on creativity, result-oriented and future-oriented while, on the other hand, keeping all the positive things already in place. Choosing a brand for the merged company was another issue.
And how was it decided in the end?
The brand of the company whose position was rock-solid was chosen.
Wasn’t that clear that the stronger brand would be chosen?
Yes and no. Which brand to keep was not even that obvious to me, and returning to the beginning of our conversation, there’s nothing obvious in making important decisions.
We considered several points. First, the markets on which the merged companies will operate. We considered products for these markets. And then, one or the other brand was placed on these markets and these products. We came up with a third point and considered the loyalty of current clients to the brands. We considered the size of these clients, the number of staff loyal to these brands that will stay in the merged companies. In other words, this was an iterative process. One of the brands was better suited to the market, while the other was better suited to suppliers. Keeping our own brand would be a simple intuitive decision: it’s dear to us and our employees.
It might not be intuition. It is perhaps ordinary egoism: this is my...
Exactly a sign of system 1: easy assumption and simplest path. Not changing anything and leaving everything as it is. Pulling in some arguments in support of the decision. Employees are bought into it, the logo is more beautiful, and the color is more pleasant. We can always find a lot of arguments for a decision we have made and argue that this is not intuition and that we really think that everything is great.
So to sum up, when we talk about risky decisions, new directions, is it system 1? When intuition and sensation are on display, it’s purely some kind of entrepreneurial choice. And when we talk about choice in established market sectors, when subtle work is required with clients, then we switch to system 2?
I would probably word it differently. If entrepreneurs acted based only on system 2, a great number of innovative solutions would not come about. It is probably so. Yet entrepreneurs should be aware that many businesses simply cannot survive if they operate constantly based on system 1. Deliberate system 2 decisions are necessary for business strategy.