In her book, How to Decide: Simple Tools for Making Better Choices, Annie Duke discusses how to train our brains to combat our own bias and help ourselves make more confident and better decisions.
These are some of my favorite concepts and takeaways from reading the book.
Chapter 4 “The Three Ps: Preferences, Payoffs, and Probabilities”
In this chapter, Annie Duke goes into the necessary details of building an effective decision process. She suggests the following six steps:
Step 1 – Identify the reasonable set of possible outcomes.
Step 2 – Identify your preference using the payoff for each outcome – to what degree do you like or dislike each outcome, given your values?
Preferences matter. Annie suggests we identify them upfront. It is not sufficient to merely identify the possible outcomes, and we should be explicit about which outcome we would prefer to see.
Payoff also matters. While we certainly have preferences on the outcomes, we also need to put forth the effort upfront in identifying the size of the payoff. Without diligently considering the payoff’s size, it would be difficult to assess how much we should risk achieving the preferred outcome.
Step 3 – Estimate the likelihood of each outcome unfolding.
To assess whether a decision is optimal or sub-optimal, we need to know the payoff and the likelihood for any given outcome. This also implies that to become a better decision-maker, we need to be willing to make educated guesses on each outcome’s possibility.
Step 4 – Assess the relative likelihood of outcomes you like and dislike for the option under consideration.
Often, we do not prefer all outcomes equally. Combining probabilities with preferences and payoff can help us to evaluate our decision better and minimize the paradox of experience bias. By clearly defining our preference beforehand, it can help us get out from under the shadow of the particular result that we experience.
Step 5 – Repeat Steps 1-4 for other options under consideration.
Step 6 – Compare the options to one another.