The output of a decision-making process is more than just a decision
The Thinking Ahead Institute’s working group on better collective decisions has, throughout 2018, been exploring the details of how institutional investors go about the business of making choices. The group’s first paper How to choose? came out in June. A second paper is in the works, which will set out several ideas for improving decision-making in practice – ideas that range from planning tools such as the pre-mortem to the dull, but useful, checklist to tips for addressing some of the common challenges around meetings.
In this post, I take a step back from the process itself in order to discuss its output. Which might seem like a short subject: the output of the decision-making process is, surely, a decision.
Well, yes. But it’s more than that.
Suppose an investment committee is considering hiring money manager X, or adopting strategy Y. The decision they make may be, at first glance, simple: do it or don’t do it. Allocate 5% or 3% or nothing. But the way the decision was reached has knock-on effects, too.
Perhaps the committee was one of those that makes decisions based on the HiPPO principle – that’s where decisions boil down to the highest paid person’s opinion. (That’s a common way to make decisions, even though it’s not common to admit that’s what’s happening.)
Two years on, and perhaps there are some performance wobbles (as there nearly always are at some point). Does the group stick with the original decision, or does it bail? That probably depends on personalities and relationships, on whether the original hippo is still around, on whether the others in the room felt committed to the decision when it was made. So the process that was followed has an impact years later.
Or perhaps the committee followed the other common practice of requiring a consensus. Consensus is a good thing when it’s achieved authentically, but if every decision needs to be a consensus decision, it can be difficult to fully explore all possibilities. The awkward questions might not get asked. Perhaps it’s only when the performance wobbles happen that those awkward questions come up – two years later than they should have.
Then there are the decisions that are susceptible to being criticised with the benefit of hindsight, the sort of decisions that worry the lawyers. Suppose, for example, that a portfolio management team decides to disinvest from companies with poor environmental records because of the downside risk this creates. Or that a corporate defined contribution plan decides to move significantly away from the peer group average asset allocation in its default strategy, in order to increase the probability of meeting the plan’s objectives.
These decisions may lead to losses, even if they are based on prudent and rigorous analysis. If that happens, it’s not enough simply to have made a sound decision, you also need to be able to demonstrate that you did so. So the process itself, and the documentation of the process, is a critical output.
There’s a danger, of course, that concerns about hindsight-driven criticism will constrain decisions. At its worst, this can mean fiduciaries fail to take actions that are in participants’ best interests. I’ve written previously about the need for fiduciaries to avoid the temptation to hide in the herd. But it would be foolhardy to ignore the possibility of somebody challenging a decision at some point in the future.
Finally, few investment decisions are standalone decisions. Most groups do not come together to make one decision only. So the way each decision is made feeds back into the group dynamics, and shapes how the next discussion will go. An open conversation creates the conditions for a better decision next time, as the group becomes comfortable with one another. Groups tend to become more cohesive and effective over time. Occasionally, this can go too far, creating the possibility of groupthink – that’s when it’s time to bring in the outsider view, or to consider shaking up the team (uncomfortable as that may be).
So that’s just a few of the ways in which the output of a decision-making process is more than just a decision. Which is even more good reason to work hard at getting that process right.
