Data-driven Decisions and Why they Work, Part 1

Watch any episode of Mad Men and you will see Don Draper and his executive peers making big business decisions with their tried-and-true gut instincts. While fictional characters continue to see success with this approach, it’s quickly becoming an archaic way of doing business in the real world. Executives are now embracing technology like data analytics to bolster their decision-making. Learn how the process of business intelligence can help with driving your company’s strategy – no matter the size of your business.

Historically, most of the business world credits its success to decisions made by businesses’ executive teams. We see examples of this all the time; Bill Gates building his Microsoft empire, Mark Zuckerberg turning a college social network into a worldwide conglomerate, or Warren Buffet’s continuous winning investments that earned him the nickname the “Oracle from Omaha.”

Many people assume that a leader with a strong track record relies heavily on gut instinct and will lead their company to success. In fact, this was one of the leading investment strategies of the 20th century; angel investors and venture capital firms placed their bets on a company by looking at the skills and confidence of its management team. However, in our ever-evolving age of technology when obtaining and evaluating large amounts of data is becoming easier every day, we are starting to see that making data-driven decisions leads a company to success far more often than gut instinct.

Place your bets on data

In his book, Thinking, Fast and Slow, Nobel Prize winner Daniel Kahneman identifies a number of biases that cause us to ignore real logic and make irrational decisions – and most of the time, we don’t even know we’re doing it. In one example, he explores the concept of “an inside view,” that makes us overly optimistic about the results of a project we’ve set out to do. Even when we are faced with clear and damning statistics about a very low success rate for a project, we tend to ignore the statistics in favor of blind optimism. Sure, most people may fail, but we will be the ones that break through, right? This thinking is what keeps us clinging to an unsuccessful project rather than cut our losses and call it quits.

Kahneman’s famed concept of “prospect theory” describes how people choose between different options (or prospects) and how they estimate (with bias) the perceived likelihood of these options. Within this theory, he notes that most people have a strong aversion to risk when it comes to gains. If a person is presented with a choice where they could win $30 with certainty or have a 50/50 chance to win either $100 or nothing, most people will accept the certain but smaller amount rather than gamble and potentially win much more.

Maybe that scenario doesn’t surprise you, but what about when a person is faced with a loss? If a person was presented with a choice of either losing $30 with certainty or gambling on a 50/50 chance to lose either $100 or nothing, most people will take the gamble even though the expected loss may be greater. When considering this kind of gamble in your business where you’ve got to decide whether to stop investing in a losing project, many executives would rather roll the dice and continue to bleed cash for something that outside viewers see as bound to fail.

Now, I don’t want you to abandon your goals with this knowledge. On the contrary, I tend to believe in people following their passions and pursuing lofty goals. However, this kind of thinking can work to the detriment of a company executive who faces scores of such decisions on a daily basis. Making multiple decisions based on gut instinct alone can drive even the best business into the ground.

Next week, I will share how we can avoid the mistakes that our biased minds are programmed to make and leverage data (and perhaps a bit of gut instinct) for success.