The process of decision making almost always involves some degree of uncertainty. Some strategies can be more valuable, more beneficial, or less risky than others—but how do you really know what works best? In this post we describe the 4 things that you need to know in order to really find out.
For the sake of simplicity we will limit decisions and outcomes to a “yes” or “no.” For example, imagine that you are evaluating job candidates using their resumes. Either the candidate is a good fit for the job (“actually yes”) or they are not (“actually no”); and either you decide to hire them (“respond yes”) or not (“respond no”). In this scenario, there are 4 possible outcomes:
- HIT: The candidate is a good fit for the job, and you decide to hire them
- MISS: The candidate is a good fit for the job, and you decide not to hire them
- FALSE ALARM: The candidate is not a good fit for the job, and you decide to hire them
- CORRECT REJECTION: The candidate is not a good fit for the job, and you decide not to hire them
Note that we often will focus only on the “hits” and “false alarms”—the value added by people who were hired and worked out well, and the costs incurred by people who were hired and weren’t a good fit for the job.
But this picture would be very much incomplete. What about “misses” and “correct rejections?” Surely some of the people you turn away are not a good fit—perhaps they are not qualified or don’t have enough experience—but surely some of them also represent valuable missed opportunities.
Without considering these possibilities, you will never know how often you are actually turning away very good people (this New York Times bestseller and Oscar-nominated movie have greatly popularized the concept).
It is also important to consider how strict we are being, and the amount of uncertainty involved. We know that resumes can be somewhat ambiguous, and there is always at least some doubt about the accuracy of the claims being made. We can describe the possible outcomes in terms of probability curves like so:
Now watch what happens when we use more strict criteria (this moves the vertical dotted line to the right). While this can increase the chances of “hits” and reduce “false alarms,” it also increases the number of misses.
Compare this to what happens when we instead reduce the amount of uncertainty. Perhaps instead of just relying on resumes, we also have the candidates complete assessments or interviews. This can increase the chances of “hits” and reduce “false alarms,” while at the same time reducing the number of misses.
What can we take away from this?
- The only way to really find out if something works well is to compare it to other things. What happens when you don’t follow your favored strategy? Consider not just what you can gain, but also what you might be missing out on.
- More information is often better. If you can reduce uncertainty, it allows for decisions that not only maximize gain and minimize risk, but also are less likely to overlook valuable missed opportunities. This delivers the elusive competitive advantage that many of us have been searching for all along.