Decision-Making: The Role

Zeger Degraeve, Professor of Decision Sciences, London Business School.

People claim they use their intuition whilst making critical decisions but intuition can be a bad teacher. Through an insightful case study, this article discusses the role and use of intuition in our decision-making processes.

The Russian roulette case study

Imagine you are playing Russian roulette, risking your life for a high-stakes wager in front of a group of spectators whove bet against you. You put a bullet randomly into one of six chambers of a revolver and spin the barrel. It stops. Put the gun to your head and pull the trigger Game over. You lose, you die, or, you win, you clean up: take the cash and live to see another day. Thats the simple version of Russian roulette. In our version, the aim is for you to discover some fundamental, enlightening personal traits in your own decision-making. Lets raise both the stakes and the rewards considerably. Instead of one bullet, you agree to put three bullets in consecutive chambers: bullet bullet bullet empty empty empty. As you load the barrel you start feeling uncomfortable. To strengthen your resolve you cast your eye over the piles of banknotes on the table. The stakes are raised further, you agree to re not just one but three shots. The banknotes pile higher. The spectators wait eagerly. Your palms get a little clammy; your hands tremble slightly; you cant help but show the mounting discomfort on your face. Why do you feel like this? Take a moment to consider and write down your response. What was your answer? Fear of death? Your low chance of survival? Were certain its the latter. Why? Survival is your goal, the answer to one of the key questions to be addressed during a good process of making decisions. Back to the game. Youre in luck! You can choose how to play. You can either opt for Choice One: spin the barrel between each shot (spin shoot, spin shoot, spin shoot). Or for Choice Two: spin the barrel only once at the beginning and then take your three shots (spin shoot, shoot, shoot). Clearly whether you choose One or Two, if a shot res during the process, you die and the game ends. Please write down which Choice you opt for. Take as much time as you like. In the classroom at this point we count the number of people who opted for Choice One and the number who chose Two. The poll typically reveals that about 70% chose One while 25% chose Two; there are always some students

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of Intuition
who dont participate. These non-participants illustrate our rst point: Decision-Making requires courage! Making a decision puts you on the spot, leaving you exposed. Now, if a decision-maker does not really know what he/she is doing, he/she is in a very precarious position. Typically, decision-makers face risk and uncertainty; they are accountable and they will be judged on the quality of their decisions and on their results. This article, in essence, is about understanding your own decision-making processes. So which Choice should you have made? The answer is Choice Two! Surprisingly the majority of business school students and executives Ive taught over the last ve years chose One. Why is that? What was going on in their minds? Are they stupid? Obviously not; our students are highly educated, successful business people. No, something much more fundamental is going on. What do you think it is? Figure 1: Choice two

If the trigger lands on chamber 1, you survive 3 consecutive shots without spinning in-between. If the trigger lands on chamber 2, you are shot dead in the third shot with the bullet in chamber 4. If the trigger lands on chamber 3, you are shot dead on the second shot with the bullet in chamber 4. If the trigger lands on chambers 4, 5, or 6, you are dead immediately. So, only 1/6 chance of survival.

Let us analyse the Russian roulette problem.

Resolving Choice One: The rst spin shoot gives a probability of survival of . If we survive, we spin again and shoot, again giving a probability of survival of . The probability of surviving the game twice in a row is therefore * = . If we survive the second shot, we spin again and shoot, again giving a probability of survival of . The resulting probability of surviving the game opting for Choice One is therefore * * =1/8. Whereas the probability of survival with Choice Two is 1/6; making it the better choice. You may be able to work the probability out yourself but dont worry if you cant, we will explain. Resolving Choice Two: As illustrated in Figure 1, imagine consecutive chambers 1, 2 and 3 are empty and chambers 4, 5 and 6 are loaded. You will only survive if, after spinning the barrel, the trigger lands on chamber 1. This being the rst of 3 consecutive empty chambers. If the trigger lands on any of the other chambers, a bullet will be discharged within the maximum of the 3 shots. Therefore, 1 out of 6 chambers gives you a total survival probability of 1/6. Lets face it, a 1/6 chance of survival is only marginally better than 1/8, so whichever choice you made, youre

more than likely going to die. But that, of course, is not the point of the exercise and neither is testing your maths and stats ability. Rather, it is to understand the fundamental decision-making phenomenon going on during the game. How did you make your decision? Many people respond that they used their intuition; making a decision based on gut instinct. So are we suggesting that intuition is wrong? That instinct cant be trusted? That you shouldnt rely on gut feel? Denitely not! Intuition is vital. Use it! However, be aware that intuition can lead you down the wrong path. My claim will be that to become a better decision-maker you should: step back, think twice, challenge and complement your intuition with analysis. However, if you shouldnt rely solely on intuition neither should you rely solely on analysis. You will become a far more effective and condent decision-maker if you use both. Think about it. If your intuition and analysis both suggest the same course of action, thats great; go for it. However, if they suggest different courses of action, you have an opportunity to search for greater insight into what you should do. It makes sense to question both your intuition and your analysis. Clearly in the Russian roulette game, intuition can be wrong, but in other situations, analysis may lead to false

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results. If they suggest different solutions, your best approach should be to reect further, ask experts, and undertake further analysis and research; rening and exploring further. Ask yourself if I stepped into your shoes right now, would you trust me, with your end-of-year grade? Likewise, would I trust you with my teaching evaluations? We use our intuition all the time, in all different situations and, for the most part, it serves us well. But it is a special kind of intuition that we need. It may sound like we are suggesting that it takes a lot of time to make good decisions. We will demonstrate, in fact, that good decision-making is a skill you can master. I like to compare it to the many skills that we have acquired, for example, the skill of playing golf. Of course some of us are better at playing golf than others; compare our skill to Tiger Woods to illustrate. But that doesnt mean that with the proper tools, the right pro, and lots of practice, we cant all acquire a reasonable mastery of the game and enjoy playing. In golf, once you master the swing, it will typically take no longer to execute a good swing than to execute a bad one. Similarly, once you master the process of making good decisions, it will typically take you no longer to make a good decision than to make a bad one. All it takes is to acquire the toolset and then practice. Finally, like with golf, youll need a good pro and I am delighted to be your teacher. The key question that comes out of the Russian roulette exercise is Why didnt we do the analysis in the rst place? Is it laziness? Lack of time? I did say take your time! In the classroom, some participants reply they were being polite, not wanting to make everyone wait while they did their calculations Thats ne. Its certainly true that theres a real-world perception that making swift decisions is a key leadership trait signalling knowledge about the issues, expertise and condence. However, leaders can also be condently wrong! Think about this idea: the CEO has been asked for a decision. Rather than making a pronouncement then and there, he/she signals thoughtfulness asking for time to reect. Saying Hold on a moment, let me think about this that if we do if we try X then Y could happen Taking it even further, inviting the enquirer to participate in the thought process The this that if we do and invitation to participate are all part of a sound decision-making process.

You may have noticed, though, that theres something even more fundamental going on. Something so fundamental that we all fall prone to it. As a species we are not hard-wired to step back, think twice, challenge, confront and complement our intuition with analysis! Psychologists have gured out that our intuition has served us so well that we owe our very existence to it. We have an urge for action rather than reection because in critical life-anddeath situations, on average, our intuitive reactions have signalled to us the course of action that has helped us survive the challenge. It goes right back to our earliest origins. Big tribes, large families, many wives, lots of kids: hungry kids, crying kids We get a group of guys together to go hunting for food. After trekking through the woods we see a herd of elephants, enormous beasts, huge teeth hmmmn, too big, lets kill the baby elephant. We gang together, separate the baby, jump on it, spear it, stone it, etc. Result: dead elephant, big barbecue enough meat for all and enough skin for clothing, stomachs are full, kids are quiet, everyones happy. We fall asleep in the grass, the sun is shining warmly, a little river is owing by, and birds are singing in the trees suddenly we hear a loud trumpeting noise in the bushes, like a very angry elephant What do we do? Do we ask ourselves, What is the probability that the mother elephant is coming to get us? Do we ask ourselves, What is the probability that mother elephant knows we killed her baby? Do we ask ourselves, What is the probability that the mother elephant is hungry? Unlikely! I, like you, would just jump up and run as fast as I could! An intuitive gut reaction. Theres really nothing much we can do to prevent this gut reaction; it is extremely hard for us to go against the grain. Almost the only thing we can do is to make ourselves aware of when we are reacting on instinct and try to manage it. We need to force ourselves to step back, think twice, reect, challenge and complement our instinctive reactions with analysis. In business, it is often not enough to trust gut feel; important decisions cannot generally be left to intuition alone. We need to evaluate different courses of action, make recommendations and communicate the structure of our reasoning. We often have to defend our choices and give presentations to show the thoroughness of our analysis. We also need to make sense out of various sources of data and organise the inputs of experts and colleagues.

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Now youre aware of the issue, you will start to be able to manage your gut feelings. Imagine you are playing another game of Russian roulette but this time theres only one bullet although you still have to take three shots. You put the bullet into a random chamber and close the barrel. You have the same two choices for taking your shots: Choice One: spin shoot spin shoot spin shoot Choice Two: spin shoot shoot shoot Which Choice do you prefer? Please write down your answer. What are you doing right now? Almost everyone at this point will start doing the calculations, challenging and complementing their gut feel with analysis. In the classroom we take another poll. We nd that a large majority, typically about 90% will favour Choice One, while only a few people, typically 2% or less, will prefer Choice Two. The number of people who have not voted is also typically larger. This illustrates our earlier point again, decision-making requires courage And the answer is, you should choose One. The vast majority of the class is right this time, proving our claim that we can all make good decisions, once we know how! Lets quickly run through the analysis. Choice One: the probability of survival at the rst shot is 5/6, second shot 5/6, third shot 5/6 because the barrel is spun before each shot. The resulting probability is 5/6 * 5/6 * 5/6 = 58% Choice Two: as illustrated in Figure 2, the resulting probability of survival is 50% as there are three empty chambers that will allow us to survive three consecutive shots without spinning in-between. Is it clear? Not really difcult after all! To reiterate, we have challenged and complemented our intuition with analysis, made adjustments and arrived at the right conclusion. What type of intuition is really necessary for making good decisions? Ever heard of Jack Welch? Of course, nearly everyone has. Jack Welch is the ex-CEO of GE. Why is he so famous? He is generally recognised to be the most effective CEO of the 20th Century. He has created more shareholder value than any other CEO in history.

Figure 2: Choice two

If the trigger lands on chambers 1, 2 and 3, you survive 3 consecutive shots without spinning in-between. If the trigger lands on chamber 4, you are shot dead in the third shot with the bullet in chamber 6. If the trigger lands on chamber 5, you are shot dead on the second shot with the bullet in chamber 6. If the trigger lands on chamber 6, you are dead immediately. So, we obtain a 3/6 chance of survival.

On his retirement, Jack Welch wrote a book. Perhaps you remember the title? Its a four-letter word (perhaps a little vain) and a subtitle JACK: STRAIGHT FROM THE GUT. Can you imagine how I felt, one lovely spring morning walking into my ofce, opening my mail and nding Jack Welchs book? Here is the most effective CEO of the 20th Century telling us that he makes decisions FROM THE GUT. I felt like throwing in the towel! After all, I am simply a business school professor who, for the past twelve years, has taught my students to watch out and be careful of intuition that it can be a very bad teacher. Here is the most effective CEO of the 20th Century telling us that he makes decisions from the gut! I might as well pack up and leave the business school; perhaps the best I can hope for is to teach a bit of maths and stats at high school. So why am I still doing it? Why am I still teaching at London Business School? Do you know when Jack Welch retired from GE? In 2001. Do you know when he joined GE? In 1961. Jack Welch started working at GE as a young engineering graduate on the shop oor giving directions to a group of blue collar workers. Do you know when he became CEO of GE? In 1981. Jack had already worked for

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over 20 years at GE when he became CEO, he had worked for over 40 years for GE when he retired. What, in fact, does Jack Welch mean by gut? Clearly, he is talking about experience. So there it is. In situations where we have a lot of experience, we can rightfully trust our gut feelings, with much more condence than in situations where we do not have experience. In the continuum between analysis and experience, it will be up to you to make the trade-off. This trade-off should be made on the basis of your past knowledge about the issues you have to address. When we talk about intuition that is useful, we mean informed intuition, intuition developed through experience. In situations where we havent got much experience, please challenge your intuition as much as you can by using rigorous analysis. Here is my nal question: How many of you have ever played Russian roulette? So why were you trusting your gut feeling in a situation where you have no experience? It was certainly the wrong place to trust your intuition and you should have used all the analysis that you could to bring to bear to the problem.

for McKinsey & Co., environmental planning for the European Commission, accounting for procurement strategy for Cockerill Sambre and Alcatel Bell in cooperation with Arthur Andersen Business Consulting and project portfolio management with Novartis. He has also developed optimization methodology. He has won the Association of the European Operational Research Societies (EURO) Prize for the Best Applied Paper of the Year 1997 and the Chairmans Award for the Best Applied Contributed Paper to the Dallas INFORMS Conference. He has publications in top scientic journals such as Management Science, Operations Research, the INFORMS Journal on Computing, the European Journal of Operational Research, the Journal of the Operational Research Society and the Harvard Business Review. In addition, he has been a regular speaker at international conferences and he is an award winning executive education teacher.

About the author

Zeger Degraeve obtained the Ph.D. degree in Business Administration from The University of Chicago, Graduate School of Business with a concentration in decision sciences and production management in December 1992. Since then he has been a Professor of Management Science in the business school (Department of Applied Economics) at the Katholieke Universiteit Leuven in Belgium. In September 1999, he joined the London Business School as an Associate Professor of Decision Sciences and was promoted to Professor of Decision Sciences in July 2001. Since March 2002 he has served as Associate Dean of the Executive MBA and Executive MBA-Global Programmes at London Business School and since September 2005 he is Deputy Dean (Programmes) and a member of the Schools Management Committee and Management Board. His research and teaching interests focus on formulating models of managerial decision problems using optimization, scenario analysis and risk assessment. His interests span a wide variety of practical problems in different organizations using real data and management involvement. He has dealt with problems in operations management at Bridgestone/Firestone, logistics and supply chain management

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