Smart Choices Read online

  Copyright © 1999 John S. Hammond, Ralph L. Keeney, and Howard Raiffa

  All rights reserved

  Printed in the United States of America

  Library of Congress Cataloging-in-Publication Data

  Hammond, John S., 1937-

  Smart choices : a practical guide to making better decisions /

  John S. Hammond, Ralph L. Keeney, and Howard Raiffa.

  p. cm.

  Includes index.

  ISBN 0-87584-857-5 (alk. paper)

  1. Decision-making. I. Keeney, Ralph L., 1944- . II. Raiffa,

  Howard, 1924- . III. Title.

  BF448.H35 1999

  153.8'3—dc21 98-8118

  CIP

  Parts of Chapters 5 and 6 were previously published as “Even Swaps: A Rational Method for Making Trade-offs” in Harvard Business Review (March–April 1998). Parts of Chapter 10 were previously published as “The Hidden Traps in Decision Making” in Harvard Business Review (September–October 1998).

  ISBN 978-1-63369-104-9

  eISBN 978-1-63369-105-6

  The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.49–1984.

  CONTENTS

  Preface

  1 Making Smart Choices

  How to think about your whole decision problem: a proactive approach

  2 Problem

  How to define your decision problem to solve the right problem

  3 Objectives

  How to clarify what you're really trying to achieve with your decision

  4 Alternatives

  How to make smarter choices by creating better alternatives to choose from

  5 Consequences

  How to describe how well each alternative meets your objectives

  6 Tradeoffs

  How to make tough compromises when you can't achieve all your objectives at once

  7 Uncertainty

  How to think about and act on uncertainties affecting your decision

  8 Risk Tolerance

  How to account for your appetite for risk

  9 Linked Decisions

  How to plan ahead by effectively coordinating current and future decisions

  10 Psychological Traps

  How to avoid some of the tricks your mind can play on you when you're deciding

  11 The Wise Decision Maker

  How to make smart choices a way of life

  A Roadmap to Smart Choices

  About the Author

  Preface

  You're stuck. You're in a quandary. You face an important decision, and you're not sure what to do.

  You've come to the right book.

  You know success depends on making smart choices, so you want to know how to become a better decision maker.

  You, too, have come to the right book.

  We wrote Smart Choices to bridge the gap between how people actually do make decisions and what researchers—including the three of us—have discovered over the last 50 years about how they should make decisions. We have distilled for you the essence of decision-making research, combined it with experience and common sense, and presented it in a straightforward, accessible form for your regular use. The result should be hundreds, maybe thousands, of better decisions that help you reach your goals, reduce wasted time and money, and avoid hassle, worry, and regret—in short, a higher quality of life through improved decision making.

  The arguments for acquiring superb decision-making skills are compelling. You spend a significant portion of your time and psychic energy making choices. Who you are, what you are, where you are, how successful you are, how happy you are all derive in large part from your decisions. Yet decision making is seldom taught as a skill in its own right. Considering its importance, one would expect that high schools, colleges, and graduate schools would routinely offer courses in decision making and that dozens of good books on the topic would be available. Sadly, neither is true. There are few courses, few books.

  Smart Choices Provides a Roadmap for Good Decisions

  In these pages, we present a clear process and a set of user-friendly techniques for making smart choices. We show you what you need to consider in evaluating your options and the steps you need to take to arrive at the smart choice. The essence of our approach is divide and conquer: break your decision into its key elements; identify those most relevant to your decision; apply some hard, systematic thinking; and make your decision. Our approach is proactive, encouraging you to seek out decision-making opportunities rather than wait for problems to present themselves.

  Smart Choices is a distillation of all we have learned from our more than 100 collective years of teaching and writing about decision making, as well as the practical experience we have gained in consulting on thousands of important decisions facing individuals, families, businesses, nonprofits, and governments. You can apply our method to any decision worthy of serious thought. It will help you make smart personal decisions—from which new house to purchase, to which mutual fund to buy, to whether to have elective surgery. And it will help you make smart work decisions—from which job candidate to hire, to which business strategy to pursue, to which travel itinerary to book.

  Smart Choices Is Clear and Easy to Understand

  One reason that few people have been able to gain the benefits of all the existing research on decision making is that the insights are expressed in academic, technical prose. We strip away the jargon, allowing you to grasp the essence of the ideas quickly and surely. For your most complicated and important decisions, we provide step-by-step procedures that will help you grapple with tough tradeoffs, clarify uncertainties, evaluate risks, and make a series of linked decisions in the right sequence.

  After you've applied our method to a few of your decisions, you'll find yourself growing more and more comfortable with the process and techniques. You'll become less intimidated by making decisions, and you'll start making them faster and more easily, with less frustration and with better results. As you hone your decision-making skills, drawing on the lessons in this book, we are confident that your life will change for the better.

  Once you have read the book, you'll find that the Roadmap to Smart Choices is a complete summary of the contents. Since it mirrors the chapters, it also serves as a quick reference to any part of the book and as a refresher for its concepts. The Roadmap is at the end of the book in place of an index.

  The hardest part about writing a book is getting the words right. Fortunately, we had outstanding help. We are grateful for the astute guidance from Nikki Sabin, our HBS Press editor, for the excellent editing by Susan Boulanger and Nick Carr, for the tireless word-processing and advice from Nancy Orth, and for the helpful suggestions of many who commented on our earlier manuscripts.

  John S. Hammond

  Ralph L. Keeney

  Howard Raiffa

  CHAPTER 1

  Making Smart Choices

  OUR DECISIONS SHAPE OUR LIVES. Made consciously or unconsciously, with good or bad consequences, they represent the fundamental tool we use in facing the opportunities, the challenges, and the uncertainties of life.

  •Should I go to college? If so, where? To study what?

  •What career should I pursue? What job should I take?

  •Should I get married now, or wait? Should I have children? If so, when and how many?

  •Where should I live? Should I trade up to a larger house? What can I contribute to my community?

  •Which job candidate should I hire? What marketing strategy should I recommend for my company?

  •I feel unfulfilled. Should I change jobs? Go back to school? Move?


  •How should I invest my savings? When should I retire? To do what? Where?

  Such questions mark the progress of our lives and our careers, and the way we answer them determines, to a large extent, our place in society and in the world. Our success in all the roles we play—student, worker, boss, citizen, spouse, parent, individual— turns on the decisions we make.

  Making Decisions Is a Fundamental Life Skill

  Some decisions will be fairly obvious—‘‘no-brainers.’’ Your bank account is low, but you have a two-week vacation coming up and you want to get away to someplace warm to relax with your family. Will you accept your in-laws’ offer of free use of their Florida beachfront condo? Sure. You like your employer and feel ready to move forward in your career. Will you step in for your boss for three weeks while she attends a professional development course? Of course.

  But the no-brainers are the exceptions. Most of the important decisions you’ll face in life are tough and complex, with no easy or obvious solutions. And they probably won’t affect you alone. They’ll affect your family, your friends, your coworkers, and many others known and unknown. Making good decisions is thus one of the most important determinants of how well you meet your responsibilities and achieve your personal and professional goals. In short, the ability to make smart choices is a fundamental life skill.

  Most of us, however, dread making hard decisions. By definition, tough choices have high stakes and serious consequences; they involve numerous and complex considerations; and they expose us to the judgments of others. The need to make a difficult decision puts us at risk of anxiety, confusion, doubt, error, regret, embarrassment, loss. No wonder we find it hard to settle down and choose. In living through a major decision, we suffer periods of alternating self-doubt and overconfidence, of procrastination, of wheel-spinning and flip-flopping, even of desperation. Our discomfort often leads us to make decisions too quickly, or too slowly, or too arbitrarily. We flip a coin, toss a dart, let someone else—or time—decide. The result: a mediocre choice, dependent on luck for success. It’s only afterwards that we realize we could have made a smarter choice. And by then it’s too late.

  You Can Learn to Make Better Decisions

  Why do we have such trouble? It’s simple: we don’t know how to make decisions well. Despite the importance of decision making to our lives, few of us ever receive any training in it. So we are left to learn from experience. But experience is a costly, inefficient teacher that teaches us bad habits along with good ones. Because decision situations vary so markedly, the experience of making one important decision often seems of little use when facing the next. How is deciding what job to take or what house to buy similar to deciding what school to send your children to, what medical treatment to pursue for a serious illness, or what balance to strike among cost, aesthetics, and function in planning a new office park?

  It’s true: there’s often very little relationship between what you decide in one instance and what you decide in another. That does not mean, however, that you can’t learn to make decisions more successfully. The connection among the decisions you make lies not in what you decide, but in how you decide. The only way to really raise your odds of making a good decision is to learn to use a good decision-making process—one that gets you to the best solution with a minimal loss of time, energy, money, and composure.

  An effective decision-making process will fulfill these six criteria:

  •It focuses on what’s important.

  •It is logical and consistent.

  •It acknowledges both subjective and objective factors and blends analytical with intuitive thinking.

  •It requires only as much information and analysis as is necessary to resolve a particular dilemma.

  •It encourages and guides the gathering of relevant information and informed opinion.

  •It is straightforward, reliable, easy to use, and flexible.

  A decision-making approach that addresses these criteria can be practiced on decisions major and minor—what movie to see, what car to buy, what vacation to take, what investment to make, what department head to hire, what medical treatment to pursue. And the more you use such an approach, the more efficient and effective it will become. As you grow more skilled and your confidence grows, making decisions will become second nature to you. In fact, you may find your friends and associates asking you for help and advice with their tough choices!

  Use the PrOACT Approach to Make Smart Choices

  This book provides you with a straightforward, proven approach for making decisions. It does not tell you what to decide, but it does show you how. Our approach meets the six criteria listed above. It helps you to see both the tangible and the intangible aspects of your decision situation more clearly and to translate all pertinent facts, feelings, opinions, beliefs, and advice into the best possible choice. Highly flexible, it is applicable to business and professional decisions, to personal decisions, to family decisions—to any decision you need to make.

  One thing the method won’t do is make hard decisions easy. That’s impossible. Hard decisions are hard because they’re complex, and no one can make that complexity disappear. But you can manage complexity sensibly. How? Just like you’d hike up a mountain: one step at a time.

  Our approach takes one step at a time. We have found that even the most complex decision can be analyzed and resolved by considering a set of eight elements (see below). The first five— Problem, Objectives, Alternatives, Consequences, and Tradeoffs— constitute the core of our approach and are applicable to virtually any decision. The acronym for these—PrOACT—serves as a reminder that the best approach to decision situations is a proactive one. The worst thing you can do is wait until a decision is forced on you—or made for you.

  The Eight Elements of Smart Choices

  * * *

  Problem

  Objectives

  Alternatives

  Consequences

  Tradeoffs

  Uncertainty

  Risk Tolerance

  Linked Decisions

  * * *

  The three remaining elements—uncertainty, risk tolerance, and linked decisions—help clarify decisions in volatile or evolving environments. Some decisions won’t involve these elements, but many of your most important decisions will.

  The essence of the PrOACT approach is to divide and conquer. To resolve a complex decision situation, you break it into these elements and think systematically about each one, focusing on those that are key to your particular situation. Then you reassemble your thoughts and analysis into the smart choice. So, although our method may not make a hard decision easy, it will certainly make it easier.

  There Are Eight Keys to Effective Decision Making

  Let’s take a brief look at each of the elements of the PrOACT approach to see how they work and how they fit together.

  Work on the right decision problem. What must you decide? Is it which health club to join? Or whether to join one at all as opposed to walking more or buying some home gym equipment? Is it who to hire to manage your company’s information systems department? Or whether you should even have an information systems department as opposed to outsourcing the function to an outside provider? The way you frame your decision at the outset can make all the difference. To choose well, you need to state your decision problems carefully, acknowledging their complexity and avoiding unwarranted assumptions and option-limiting prejudices.

  Specify your objectives. Your decision should get you where you want to go. If you have to hire a new employee, do you want someone who’s a disciplined team player or a creative free spirit? Do you want a fresh perspective or solid experience? A decision is a means to an end. Ask yourself what you most want to accomplish and which of your interests, values, concerns, fears, and aspirations are most relevant to achieving your goal. Thinking through your objectives will give direction to your decision making.

  Create imaginative alternatives. Your alternatives represent the
different courses of action you have to choose from. Should you take sides in a family argument or stand aside from the rising tide of accusation and acrimony? Or should you seek a resolution palatable to everyone concerned? If you didn’t have different alternatives, you wouldn’t be facing a decision. But have you considered all the alternatives or at least a wide range of creative and desirable ones? Remember: your decision can be no better than your best alternative.

  Understand the consequences. How well do your alternatives satisfy your objectives? Alternatives beckon and beguile, but beyond them lie sometimes sobering, sometimes exciting consequences. Abandoning the corporate treadmill for your own sailboat chartering outfit in Aruba may sound enticing, but what would be the consequences for your spouse’s career, your school-age children, your aging parents, your cancer-prone skin? Assessing frankly the consequences of each alternative will help you to identify those that best meet your objectives—all your objectives.

  Grapple with your tradeoffs. Because objectives frequently conflict with one another, you’ll need to strike a balance. Some of this must sometimes be sacrificed in favor of some of that. Your career is important to you, but so is your family. You may decide, therefore, to reduce your business travel or even to cut back on your hours at the office. You’ll lose some career momentum and possibly some income, but you’ll gain time with your spouse and your kids. In most complex decisions, there is no one perfect alternative. Different alternatives fulfill different constellations of objectives. Your task is to choose intelligently among the less-thanperfect possibilities. To do so, you need to set priorities by openly addressing the need for tradeoffs among competing objectives.

  Clarify your uncertainties. What could happen in the future, and how likely is it that it will? To decide how much money to set aside for your daughter’s college education fund, you must assess a number of uncertainties. Will she apply to an Ivy League university or a state college? Will she be accepted? Are her academic, artistic, or athletic skills likely to earn her a scholarship? Will she want to work while studying? Will she need a car? Uncertainty makes choosing far more difficult. But effective decision making demands that you confront uncertainty, judging the likelihood of different outcomes and assessing their possible impacts.