Most of us believe we make good business decisions.
Just for fun, consider this little thought experiment:
- Imagine for a minute that the quality of each of your important business decisions was measured and tracked every month.
- And that you were assigned a “batting average” that measured the quality of each of those important decisions.
Does that sound scary… or exciting?
Imagine a system where each person on your management team had a business decision “batting average” as well. Would that help you assess the value of each person on your team? Would it scare them to have a batting average based on the results of their important business decisions?
Here are a few quotes on this subject from Warren Buffett during the 1999 Berkshire Hathaway Annual Meeting that I found thought provoking:
We believe in postmortems at Berkshire. I mean, we really do believe — one of the things I used to do when I ran the partnership is I contrasted all sale decisions versus all purchase decisions. It wasn’t enough that the purchase decisions worked out well, they had to work out better than the sale decisions.
And managers tend to be reluctant to look at the results of the capital projects or the acquisitions that they proposed with great detail a year or two earlier to a board. And they don’t want to actually stick the figures up there as to how the reality worked out against the projections.
And that’s human nature.
But, I think you’re a better doctor if you drop by the pathology department, occasionally.
And I think you’re a better manager or investor if you look at every one of the decisions you’ve made, of importance, and see which ones worked out and which ones didn’t and, you know, what is your batting average.
And if your batting average gets too bad, you better hand the decision making over to someone else.”
Believability-Weighted Decision Making
In the fantastic book Principles, Ray Dalio talks about a thought provoking concept he refers to as “believability-weighted decision making”.
Here are a few quotes from his book:
I have found triangulating with highly believable people who are willing to have thoughtful disagreements has never failed to enhance my learning and sharpen the quality of my decision making.
To do it well, be sure to avoid the common perils of: 1) valuing your own believability more than is logical and 2) not distinguishing between who is more or less credible.
This sort of principled and believability-weighted decision making is fascinating and leads to much different and much better decision making than is typical. While believability-weighted decision making can sound complicated, chances are you do it all the time – pretty much whenever you ask yourself, “Who should I listen to?” But it’s almost certainly true that you’d do it a lot better if you gave more thought to it.
The most believable opinions are those of people who 1) have repeatedly and successfully accomplished the thing in question, and 2) have demonstrated that they can logically explain the cause-effect relationships behind their conclusions.
When believability weighting is done correctly and consistently, it is the fairest and the most effective decision-making system.
Every day is not a new day.
Over time, a body of evidence builds up, showing which people can be relied on and which cannot. Track records matter, and at Bridgewater tools such as Baseball Cards and the Dot Collector make everyone’s track records available for scrutiny.”
Track Your Batting Average
Take an important decision like a capital expenditure or other large purchase or investment and document key management’s expectation of results.
Then create a simple process where you sit down to evaluate results vs. expectation after six months, one year, eighteen months, etc.
Rinse and repeat for future big decisions and see what you find.
I bet you will find that some of your management team are better than others when it comes to the quality of their important business decisions… and outcomes.
Philip Campbell is a CPA, financial consultant, and author of the book A Quick Start Guide to Financial Forecasting: Discover the Secret to Driving Growth, Profitability, and Cash Flow and the book Never Run Out of Cash: The 10 Cash Flow Rules You Can’t Afford to Ignore. He is also the author of a number of online courses including Understanding Your Cash Flow – In Less Than 10 Minutes. His books, articles, blog and online courses provide an easy-to-understand, step-by-step guide for entrepreneurs and business owners who want to create financial health, wealth, and freedom in business.
Philip’s 30 year career includes the acquisition or sale of 33 companies (and counting) and an IPO on the New York Stock Exchange.
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