Myth of rationality: Does regret impair your decision making ability?
To evade a sense of regret - that your strategic planning exercise was a waste of time, consider approaching problems with both a blend of using analogy and first principles thinking.
“I knew that if I failed I wouldn't regret that, but I knew the one thing I might regret is not trying,” - Amazon founder, Jeff Bezos.
We assume people make unemotional rational decisions. Theory of Games and Economic Behaviour written by John von Neuman and Oskar Morgenstein, published in 1947 is the classic on the rules of rationality.
Imagine you go into a shop for a sandwich and the lady behind the counter says she has only chicken or beef and you say, “Oh, let me have beef”. Then the lady says, “Oh I forgot I also have ham.” You respond, “Let me change my order to chicken.”
One can’t be considered rational if you change your order, just because you found they also have ham. If one assumes people are rational, then financial markets should be too.
Myth of rationality
Problem is that the idea of the person described in economic’s course 101 - who acts to maximise their utility in a rational way is a bit of a myth. [Utility is the satisfaction or benefit derived from consuming a good or service.] When people make decisions, they are not dispassionate; emotions rule. This is the thinking that led the psychologist Daniel Kahneman to win the Nobel Prize for economics, con
Rain dancing or creating real insights?
Before you shoot off on the next business planning retreat, consider the thoughts of the Dartmouth professor, Brian Quinn who notes: “A good deal of the corporate planning I have observed is like a ritual rain dance; it has no effect on the weather that follows, but those that engage in it think it does.
Moreover, it seems to me that much of the advice and instruction related to corporate planning is directed at improving the dancing not the weather.”
Is planning wrong? No, it’s just typically poorly done. Insightful strategic planning combines hard analysis with creativity, taking into account the turbulent business environment. Why do managers have this addiction to notion of believing they can plan accurately long into the future? Perhaps it is the idea that they don’t want to regret the opportunity of ‘giving it a shot’, even if they know, what they plan for, is unlikely to happen the way they think it will?
Let’s imagine for the moment that there are two ways to do strategic planning by analogy and going back to first principles. One is much easier than the other. These days it would be easier to create a quite polished business plan by accessing artificial intelligence and programme like Chat GPT. Whether it would have the buy-in of senior managers, is another issue.
Strategy begins by addressing the real-on-the ground problems facing the organisation. It does not start with blue sky notions of some [inevitably] glorious vision and mission statements.
First principles thinking is one of the most effective planning approaches managers can employ for breaking down complicated problems and generating original solutions. It is also the single best approach to learn how to think for yourself.
First principles approach has been used by many great thinkers including printing press inventor Johannes Gutenberg, military strategist John Boyd, and philosopher Aristotle. Based on his training in physics Elon Musk, has used first principles thinking more effectively than most.
To evade a sense of regret - that your strategic planning exercise was a waste of time, consider approaching problems with both a blend of using analogy and first principles thinking.
Forget doing age-old worn-out SWOT (Strengths, Weaknesses, Opportunities, and Threats) exercise, focus on being [numbers and facts] analytical, using inductive logic, setting a hypothesis of what one thinks is happening, then doing the objective research to prove, or disprove what you think may be true.
Don’t try and be all things, to all people. Strategy is about making trade-offs, about creating value along a chain of activities. What is the unique value proposition for the customers, and how does one price the offering? It is about choosing what not to do, as much what to focus on. This is not easy, it forces managers to question fundamental assumptions, and conventional wisdom.
Avoid that feeling of regret. “Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did do,” said Mark Twain, a writer.
