Is your decision making based on Analytics or Gut feeling?

Despite the proliferation of data and the constant drive to adopt innovation to achieve competitive differentiation; many businesses continue to make critical business decisions that are a product of intuition and haste rather than fact and rigor.

40% of major decisions are still based on your Manager’s gut feeling

The question as to why companies continue to rely on ‘best-guesses’, despite the availability of advanced business analytics, quantitative models and optimisation methods is confounding. Using data and quantitative analysis to support decision making, removes ambiguity and improves speed and accuracy. Decision making is more likely to be correct and the process has more rigor due to the application of the scientific method.

However, research conducted in the US in 2010 confirmed that over 40% of major decisions are based not on facts but on that mysterious place, your Manager’s gut – and my gut feeling tells me this number sounds pretty conservative. In many organisations decision making is still considered the exclusive domain of senior managers. These decisions remain mysterious, information goes in, some decisions come out, and it’s hard to know what happens in-between.

‘decision making is a far more complex mix of reason, intuition and emotion than we previously thought’

While the science of decision making is still relatively new, recent research confirms that decision making is a far more complex mix of reason, intuition and emotion than we have previously thought. The traditional view that complex decisions require the exclusion of emotional inputs in preference for rational thought and systematic fact-based reasoning, appears to run counter to current findings.

Research suggests that the conventional wisdom about decision making may be the opposite of what actually happens. It is easy problems that are better suited to the rational brain and more complex problems best suited to the emotional brain. In fact, if we relied on reason alone we would be almost incapable of deciding anything at all.

Some scientists believe that we can consciously process somewhere between five and nine pieces of information at any given time. Too much information can actually interfere with understanding. When the prefrontal cortex is overwhelmed the person can no longer make sense of the situation. Correlation is confused with causation and people make theories out of coincidences.

On the other hand, the emotional brain has a longer path of evolutionary development and is especially useful at helping us make hard decisions. The emotional brain has massive computational power, it can process millions of bits of data in parallel and can analyse a huge range of relevant information when assessing alternatives.

‘you may be surprised to learn that a majority of these (decisions) were strongly influenced by your gut-feeling’

The implication for managers is clear, even if you think you are approaching complex problems with methodical emotionally-detached logic, you are tapping into the superior processing powers of the emotional brain. If you reflect on the number of important complex decisions you have made in the past week, month or year, you may be surprised to learn that a majority of these were strongly influenced by your gut-feeling, and you may not even have been aware of it!

‘The human brain is not designed to deal with a deluge of data’

The human brain is not designed to deal with the massive amounts of data that we currently subject ourselves to. As a result we are constantly exceeding the capacity of prefrontal cortices, overloading our capacity to process the deluge of facts, figures, variables and scenarios required for effective operational, tactical and strategic decision making.

In a normal business day Managers are faced with the steady flow of time-critical complex decisions. Very quickly they reach the extent of their ability to process all of the variables, constraints and trade-offs, begin to feel overwhelmed, go with their intuition or gut-feeling, then produce a rational explanation of why they made the choice.

Business environments require explicit logic, reasoning, supporting data and repeatable processes, so relying exclusively on the traditional mix of reason, intuition, emotion and gut feelings is neither an effective or sustainable response.

For too long, managers have relied on their intuition to make decisions, based not on data, but on the experience and unaided judgement of the decision maker. If we want to make better decisions and take the right actions, mathematical modelling, advanced algorithms, statistics, optimisation and simulation are the tools to provide rigor and insight and support complex decision making.

Embedding Analytics and Optimisation

While we are all familiar with the success stories based on Entrepreneurial flair and daring, if decision making is allowed to reside with the gut of high performing Managers, when it comes time for them to leave your organisation, your decision-making competitive advantage walks-out the door with them.

‘Analytics and optimisation shift from being an occasional activity to a normal part of doing business’

Alternatively, embedding the use of data, statistical and quantitative analysis, explanatory and predictive models and fact based management to drive decisions can make an inimitable capability. Using Analytics isn’t just a way of looking at a particular problem, but rather an organisational capability that can be measured and improved.

When embedded in processes and workflow, analytics and optimisation shift from being an occasional activity to being a consistent decision making support function, a normal part of doing business. Embedding analytics and optimisation into processes improves the ability of the organisation to implement new insights. It eliminates gaps between insights, decisions, and actions.

But does the use of Business Analytics and Optimisation in decision-making produce better performance?

Well the team at MITSloane certainly think so and their 2010 research with IBM of nearly 3000 executives, managers and analysts certainly provides some interesting support.

The following summarised some of the findings consistent with Top performing organisations;
• They make their decisions based on rigorous analysis at double the rate of lower performers.
• Use analytics five times more than lower performers.
• View analytics as a key differentiator.
• Are twice as likely to use analytics to guide day-to-day operations as lower performers.

The research certainly suggests a connection between performance and the competitive use of business analytics and optimisation. There is no doubt that best performing organisations approach business differently from their peers, specifically putting business analytics and optimisation to work in the widest range of decisions both small and large.

To some extent, this creeping improvement of decision making can be seen as an inevitable evolutionary path, as our society becomes computerised, data-rich, and analytical. While the data-deluge is proving overwhelming for some organisations, businesses which have embraced the surfeit of data as an opportunity are capitalising on business analytics and optimisation for improved decision-making.

If you want to make better decisions and are prepared to accept that your attempts at logical, rational emotionally-detached reasoning are more a mixture of intuition and emotion, then you need to consider using the power of mathematics bound-up in business analytics and optimisation. This will ensure that your decision making is a robust, rational and repeatable process and more importantly, if embedded in your business, can provide a powerful competitive advantage.

Socrates is believed to have said ‘The unexamined life isn’t worth living’. We would suggest that ‘the unexamined decision isn’t worth making.’

Biarri Optimisation

Biarri is an Australian company that operates globally. We provide a single point of truth within your data so that you can make better decisions on your day to day operational, and long term strategic decisions. Through powerful software solutions delivered through the cloud, we can help you make better, more informed decisions supported by quantitative analysis.

We have worked across many different industries; Rail, Oil and Gas, and Mining; On a bunch of different problems such as supply chain planning, resource scheduling, cargo management and more.

If you would like to find out how you can make better decisions, supported by analytics, get in contact today!

Refererences:
Accenture Study, 2010
Analytics at Work: Smarter Decisions, Better Results, Thomas H. Davenport etal,  2010
Competing on Analytics: The New Science of Winning, Thomas H. Davenport and Jeanne G Harris, 2007
The Decisive Moment, Jonah Lehrer, 2010.
MIT Sloan Management Review, ‘Analytics the New Path to Value’, Research Report, 2010