Monday, June 10, 2013

In the business game, less is often more

It's a holiday, so let's talk about sport not business - for openers, anyway. Indoor handball is a team sport where players face a constant stream of quick decisions about what to do with the ball: pass, shoot, lob or fake?

Players have to make these decisions in an instant. Would they make better decisions if they had more time and could analyse the situation in depth?

In an experiment with 85 young, skilled handball players, each stood in front of a screen, dressed in his uniform with a ball in his hand. On the screen, video scenes of high-level games were shown. Each scene was 10 seconds long, ending in a freeze-frame.

The players were asked to imagine they were the player with the ball and, when the scene was frozen, to say as quickly as possible the best action that came to mind.

After these intuitive judgments, the players were given more time to inspect the frozen scene carefully, and name as many additional options as they could. For instance, some discovered a player to the left or right they had overlooked, or noticed other details they weren't aware of under time pressure.

Finally, after 45 seconds they were asked to conclude what the best action would be. In about 40 per cent of cases this considered judgment was different from their first choice.

OK, that's enough fun. Back to business. We live in a business world where the thinking of educated people has been heavily influenced by rational analysis. For instance, one rational conclusion is that to make good decisions we need the best information possible. To be better informed is to perform better.

These days, all switched-on managers know they need an adequate business information system - the right "metrics" - to be fully informed about their business's performance and so be able to make the right decisions to keep it scoring goals.

To the rationally trained person, more information is always better and more options to choose from are always better. Economists add the qualification that information is often costly, so you shouldn't keep collecting it beyond the point where the additional cost exceeds the additional benefit.

Practical managers know there's a trade-off between speed and accuracy. It's good for decisions to be as accurate as possible, but it's also good for decisions to be made without much delay. So the smart manager finds a happy medium between accuracy and speed, knowing they're sacrificing some accuracy for a speedy decision.

Back to handball. This experiment was recounted by German psychologist Gerd Gigerenzer, of the Max Planck Institute in Berlin, in his book Gut Feelings. To measure the quality of the actions the players proposed, the experimenters got professional-league coaches to evaluate all proposed actions for each video.

They found that, contrary to the notion of a speed-accuracy trade-off, taking time and analysing didn't generate better choices. The players' gut reactions were, on average, better than the actions they chose after reflection.

Indeed, the order in which possible actions came to the players' minds directly reflected their quality: the best came to mind first, the worst came last. This result is consistent with many experiments showing that, though the inexperienced need to think it through carefully before they take a golf shot, drive a car, or tie their shoe laces, the experienced do better if they don't think about what they're doing but simply do what comes naturally.

This is consistent with another finding that chicken sexers, chess masters, professional baseball players, award-winning writers and composers are typically unable to explain how they do what they do.

In some circumstances, more information and more time to process it is better. But a surprising amount of the time less turns out to be more.

Gigerenzer says this will be so in cases where we're relying on unconscious motor skills. It's also true when the limits of our brain power mean we make better decisions if we don't confuse ourselves with too much conflicting information.

Our brains seem to have built-in mechanisms, such as forgetting a lot of things and starting small, that protect us from some of the dangers of possessing too much information.

A famous experiment involving selling different flavours of jam in a supermarket found that having too many choices leads to decision-making paralysis. Offering a choice of six led to more sales than a choice of 20. It doesn't follow, however, that offering an even smaller choice would increase sales further.

Gigerenzer's other conclusion - of particular relevance to business decision-making - is that empirical testing can reveal simple rules of thumb that predict complex phenomena as well or better than complex rules do.