Expected utility calculation
An expected utility calculation is basically a fancy version of the ‘pros and cons’ analysis that most of us are familiar with. Instead of listing all the pros against the cons, however, we list down a bunch of ‘utilities’ — that is, things that we value e.g.: money, smart teammates, challenging problems, etc — and then we evaluate each option (startup vs FAANG vs prop trading firm) with a score for each item in this list.
Disadvantages of expected utility calculation
Expected utility calculations assume perfect information about each choice. That wasn’t the case here.
Bayesian updating
Bayesian updating is the method of ‘holding a belief, and then updating that belief as new information emerges’. It is a fantastic technique to use when making judgments of the world.
Analysis and forecasting vs effective action
But good analysis and good forecasting isn’t the same thing as effective action.
Action generates new information
You may choose to analyse, or you may choose to act. In other words, there is a real trade-off that you’re making here: time spent doing Bayesian analysis might actually be better spent acting, in order to unearth new information!
Options are occluded by uncertainty
In these academic disciplines, the assumption for rational choice is that you have a bunch of options laid out in front of you, and you must pick from one of them. This picking usually happens in an environment of perfect information.
Acting rationally or irrationally
If you pick well (meaning that you’ve maximised your ‘utility’), you are said to have ‘acted rationally’. If you’ve picked badly, you are said to have acted in an ‘irrational’ manner.
Real world has assumptions that models must make
But in reality, the models are somewhat limited because the real world doesn’t share all the assumptions that the models must make.
New information makes better decisions
most importantly, action often generates new information, which then allows you to make better decisions. In other words, there is often a cost associated with doing decision analysis, but the frameworks do not take that cost into account.
No decision making framework tells when to act
this third observation — that action generates new information, which then allows you to make better decisions — is a pretty powerful one. As it turns out, none of the decision making frameworks from the judgment and decision making literature will tell you when you should stop analysing, and when you should act instead.
Entrepreneurs are bias to action and fast adaptation
Watch any group of entrepreneurs for a long enough period of time, for instance, and you would notice that the best entrepreneurs aren’t necessarily the best calibrated Bayesian updaters or expected utility calculators. Instead, the best entrepreneurs tend to have a mix of bias-to-action and fast adaptation in response to new information.
Quote from a businessman
Why you think so much? Just act first! Then you watch and see what happens. Maybe the customer don’t like it. Or maybe your competitor do something to you because you do this. But then you know more than if you just sit here and think think think!
Reverse decisions
the contours of reality in business seem to be: A sizeable portion of decisions in business are reversible decisions. The information that comes from action is often more valuable than the insight that comes from analysis.
Acting quickly == adaptive
It shouldn’t surprise us, then, that sometimes the people who act quickly and remain adaptive are more likely to win than those who perform the best Bayesian analysis in the world.
Rapid iteration
That’s part of the product development process, is just dramatically scaling back kind of the ambition and the feature set and everything to rapidly iterate and prototype these things, but go do anything.
Doesn’t matter which decision, just move and course correct
Often you’re better off flipping a coin and moving in any clear direction. Once you start moving, you get new data regardless of where you’re trying to go.
Wasting time obsessing over inconsequential details
We can rarely know what is the best choice, and the quest for a best choice can drive us to obsess over inconsequential details.
When to analyse
Amazon CEO Jeff Bezos has a remarkably similar, if simpler formula: if the decision is reversible, act quickly, and delegate decision rights. If the decision isn’t, then analyse all you want.
Zone of indifference
The zone of indifference is when you cannot tell which decision is the best option
Millitary decision making
There are few decisions more important than on the battlefield or on the fireground, where lives are at stake. Yet military leaders and fireground commanders recognize that it is better to make a good decision fast and prepare to execute it well rather than agonizing over a “perfect” choice that comes too late.