We typically make decisions by focusing on the specific task and by using information that is close at hand. In turn we make predictions based on that same narrow and unique set of inputs. The ‘inside view’ includes anecdotal evidence and erroneous perceptions.
We make the mistake of thinking we are representative of everyone else — but why? It all comes down to three illusions.
We suffer from the illusion of superiority. An example is that we tend to believe that we are above average in our abilities as a driver — of article we can’t all be above average. It gets worse. It’s often the least capable people that show the largest gap between what they think they can do, and what they actually can achieve.
We also suffer from the illusion of optimism. Many people think that the odds of the new restaurant they’ve launched lasting five years as being very high — sadly new restaurants often fail. Most people believe that their future is bright.
Finally, we suffer from the illusion of control. Think back to the last time you played the game Snakes & Ladders. Players typically throw the dice harder when they need a high number and vice versa for a lower number. People behave as if they have some control over events, even when chance plays a big if not total role in the outcome.
The ‘outside view’ is different. It asks if there are similar situations that can provide a statistical basis for making a decision. Rather than seeing a problem as unique, the outside view wants to know if others have faced comparable problems and, if so, what happened. The outside view is an unnatural way to think because it forces people to set aside all the cherished information they have gathered.
An example of this approach is how we view other people’s situations. Ever found it much easier to diagnose the solution to someone else problem than your own? When we help a friend or a colleague we expand the frame of reference, pick up on common patterns and remove emotion from the process. We make better decisions.
How to use the outside view to make better decisions
- Sample: Gather a large sample of similar situations. Mentors and friends are great resources to get some input for the outside view of your own situation, and larger sample sets are always best.
- Analyse: See how things played out in those similar situations, focusing on the decisions made and their resulting effects. Study the distribution of outcomes and note the average and extreme successes and failures. Bear in mind thought that the failures may be much harder to see.
- Adjust: Make changes to your planning and execution to meet the statistical outcomes. Not to meet your own intuitive expectations.
- Iterate: Adjust your planning and execution in the face of new information or evidence. This last concept has taken off in the age of small start-up businesses that ‘pivot’ to new models in the face of new information.
As Michael Mauboussin says in his book Think Twice, “The main tip from the inside-outside view is that while decision makers tend to dwell on uniqueness, the best decisions often derive from sameness.”
Proceed to lesson 4