6 Tips to Foster Practical Wisdom in Decision Making

Aristotle might be best known for ‘inventing’ science (see my discussion of The Lagoon – how Aristotle invented science) and being a rather rational kind of chap. Although this is certainly true, and you can learn a lot from reading his treatises (his extant works read more like lecture notes than books) such as On the Soul, Physics, and Metaphysics, I stumbled upon the interesting Aristotelian term phronesis that translates as ‘practical wisdom’.

In The Nichomachean Ethics, Aristotle explains that practical wisdom (phronesis) is something else than scientific knowledge (epistēmē). In the sense that practical wisdom is rooted in action and can essentially create different realities (or outcomes) by taking action; scientific knowledge, instead, describes how reality is:

(..) since scientific knowledge involves demonstration, but there is no demonstration of things whose first principles are variable [such as decision making in reality], and since it is impossible to deliberate about things that are of necessity, practical wisdom can not be scientific knowledge nor art [technē, a technique, in the sense of making things]; not science because that which can be done is capable of being otherwise, not art because action and making are different kinds of things. The remaining alternative, then, is that it is a true and reasoned state of capacity to act (…).

This passage is pregnant with implications for managerial decision making. Although you should make use of scientific insights if they are available, and you should take into account knowledge on how to build real-life things (i.e. cars, bridges, consumer products, etc.), managerial decision making often has other, less tangible characteristics. For example, think about creating a strategy, an organizational structure or a company culture. Some characteristics of this kind of decision making that spring to mind are:

  • Uncertainty. You probably do not have all the knowledge and all the details. Outcomes cannot be predicted with certainty and are, thus, contingent.
  • Context-dependent. You are not taking a decision in isolation: How will my competitors act? What will my employees think and do? How will my stakeholders react?
  • Non-demonstrable outcomes. There are no scientific rules. There is not even an exact copy of the problem at hand.
  • Action-oriented. Your decision entails an actual follow-up in the real world; in a way, you will alter reality with your actions.
  • Multiple outcomes possible. Your actions will alter reality. But, the outcome is not fixed as it would be if there was scientific certainty. You change the outcome by taking different actions: you can create endless variations in strategies, organizational structures or cultures, for example.

Professors Ikujiro Nonaka and Hirotaka Takeuchi, in their Harvard Business Review article, call for ‘wise leaders’ to make decisions in such a context:

Dependence only on explicit knowledge prevents leaders from coping with change. The scientific, deductive, theory-first approach assumes a world independent of context and seeks answers that are universal and predictive. However, all social phenomena – including business – are context dependent. (…), the world needs leaders who will make judgments knowing that everything is contextual, make decisions knowing that everything is changing, and take actions knowing that everything depends on doing so in a timely fashion. They will have to see what is good, right, and just for society while being grounded in the details of the ever-changing front line. Thus, they must pair micromanagement with big-picture aspirations about the future.

Echoing Aristotle and Nonaka & Takeuchi, I therefore conclude that (managerial) decision making is not a science (epistēmē) and not a technique (technē). But, rather, it is applying practical wisdom (phronesis) to a situation that demands an analysis and a wise decision when facing uncertainties and incomplete information. Now, with Hardin, we can ask ourselves the question ‘What operations are implied by these statements?’ Or, ‘What does this mean in practice?’

In the following paragraphs, I will therefore offer 6 tips to operationalize the concept of practical wisdom.

Tip 1: use your mission and vision as a guiding principle in decision making

In taking on any decision, hold it against your mission and your vision. Your organization’s mission tells you the organization’s reason-of-being: why does your organization exist in the first place. The vision tells you what you are trying to achieve in the medium to long term. For more on one of the most important aspects of business (i.e. your mission), see my blog on business fundamentals.

Tip 2: get to the essence of a problem or a decision

Always ask yourself these questions: Why is there is a problem? What are we trying to solve? What are we trying to achieve? Nonaka and Takeuchi describe it as ‘relentlessly asking what the basis of a problem or a situation is.’ They go on to describe routines to do just that at two Japanese multinationals:

At Toyota employees ask “Why?” five times to get to the root cause. At Honda they ask the “A, A0, and A00” questions. A questions are about specifications – such as “What should the horsepower of this engine be?” A0 questions are about concepts – such as “What is the idea behind this engine?” A00 questions are about the essential goals of the project – such as “What is this engine for?”

Tip 3: understand the difference between epistēmē and phronesis, and when to use it

You don’t usually need scientific knowledge to make wise decisions (although it can be part of the data that you need for to make a decision, of course). Recognize the existence of practical wisdom (phronesis) as opposed to scientific knowledge (epistēmē). In a funny example, Nassim Taleb explains how relying on epistēmē in a situation where phronesis might be more suited, can lead to serious mistakes. He calls this the green lumber fallacy:

In one of the rare noncharlatanic books in finance, descriptively called What I Learned Losing a Million Dollars, the protagonist makes a big discovery. He remarks that a fellow named Joe Siegel, one of the most successful traders in a commodity called “green lumber”, actually thought that it was lumber painted green (rather than freshly cut lumber, called green because it had not been dried.) And he made it his profession to trade the stuff! Meanwhile the narrator was into grand intellectual theories and narratives of what caused the price of commodities to move, and went bust.

Tip 4: use heuristics (rules of thumb)

According to Taleb ‘heuristics are simplified rules of thumb that make things simple and easy to implement. But their main advantage is that the user knows that they are not perfect, just expedient, and is therefore less fooled by their powers.’ Using heuristics does not require scientific knowledge but can give you insight into what’s going on pretty quickly. In turn, you might be able to use these shortcuts for your decision making. A powerful heuristic, for example, is the 80/20 rule or Pareto principle that states that in many events 80% of the effects come from 20% of the causes.

Tip 5: develop your own heuristics through practice and experience

In practical wisdom, experience and practice take precedence over scientific rules. Through practice in the real world, you might be able to create your own heuristics about your specific (business) contexts and realities. In time, you will develop rules of thumb, or even a ‘feel’, for how things play out for your organization in a specific (Aristotle uses particular) situation. In The Nichomachean Ethics, this concept is illuminated as follows (emphasis mine):

Nor is practical wisdom concerned with universals only – it must also recognize the particulars; for it is practical, and practice is concerned with particulars. This is why some who do not know [i.e. do not have scientific knowledge], and especially those who have experience, are more practical than others who know; for if a man knew that light meats are digestible and wholesome, but did not know which sorts of meat are light, he would not produce health, but the man who knows that chicken is wholesome is more likely to produce health.

As an example, read why I use redundancy (as a heuristic) in project plans.

Tip 6: read widely

Now that we have established that (organizational) decision making is practical wisdom instead of science, you might want to practice as much as possible (and create your own practical heuristics along the way). Another way to expose yourself to as many situations as possible, and see how people react to and solve problems, is reading. Peter Drucker famously said that management is a liberal art. Liberal because management is about broadening general knowledge and experience; and an art because management is practiced by doing. So, pick up some philosophy, some history, and some literature once in a while to broaden your exposure to more Aristotelian particulars. A place to start? See last year’s holiday reading list.

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Three thinking tools to overcome confirmation bias

Understanding that your reasoning is undermined by bias, is one of the most valuable insights into your own decision making capabilities. I wrote another piece on biases (Morality Binds and Blinds), but the title might have been such that it was my least successful blog entry measured by number of reads. Or, it might just be too unsettling to think and read about the flaws in your own reasoning. Nevertheless, I think understanding biases are hugely important for better decision making, and offer you three thinking tools to overcome the arguably most famous of all biases: confirmation bias.

Falling into the trap of confirmation bias, we all do it

An intriguing discussion of confirmation bias can be found in Jonathan Haidt’s The Righteous Mind:

(…) confirmation bias, the tendency to seek out and interpret new evidence in ways that confirm what you already think. People are quite good at challenging statements made by other people, but if it’s your belief, then it’s your possession – your child almost – and you want to protect it, not challenge it and risk losing it.

People outside Haidt’s realm of moral psychology and moral philosophy also figured out that people mainly reason to be right instead of reasoning to get to the truth. Here are some quotes that sum up human nature pretty well, I feel:

The eye sees only what the mind is prepared to comprehend. (Robertson Davies, fiction writer, in: Tempest-Tost.)

For it is a habit of humanity to entrust to careless hope what they long for, and to use sovereign reason to thrust aside what they do not fancy. (Thucydides, chronicler of the Peloponnesian War, 4th century BCE.)

We human beings are egotistical animals; each of us wants to win the argument. (Garrett Hardin, human ecologist, in: Filters Against Folly.)

You would think that educating people will surely get rid of the confirmation bias. Or surely the more intelligent people are they will be able to come up with many more reasons for both sides of any argument? Think again. The opposite is quite true (again from The Righteous Mind):

The findings get more disturbing. Perkins found that IQ was by far the biggest predictor of how well people argued, but it predicted only the number of my-side arguments. Smart people make really good lawyers and press secretaries, but they are no better than others at finding reasons on the other side. Perkins concluded that “people invest their IQ in buttressing their own case rather than in exploring the entire issue more fully and even handedly”.

This is probably why rhetoric is simultaneously admired and met with scepticism. Is the rhetorician building a solid rational case? Or is she only trying to win people’s minds over for her own view? Plato famously bashed rhetoric and sophistry in his dialogues Gorgias and Republic, making the case that winning arguments with rhetoric is more about persuasion than knowledge. (Plato, in turn, was of course also accused of only coming up with supporting reasoning for his worldview. Even the greatest of thinkers are not immune to conformation bias it seems.)

If we agree that conformation bias is indeed a serious problem, it limits our capacity to reach the best outcomes by thinking that we are rational beings always arriving at rational conclusions. Haidt and others (e.g. John Gray; see my blog post on progress for a short discussion of his book The Silence of Animals – on Progress and Other Myths) even go so far as to call this the rationalist delusion. What to do?

Three thinking tools to overcome conformation bias

1. Put together a group consisting of members with different backgrounds.

Jonathan Haidt’s suggestion: always use several people with different ideologies and background when making a decision so they can disprove arguments put forward by individuals (emphasis added):

(..) each individual reasoner is really good at one thing: finding evidence to support the position he or she already holds, usually for intuitive reasons. We should not expect individuals to produce good, open-minded, truth-seeking reasoning, particularly when self-interest or reputational concerns are in play. But if you put individuals together in the right way, such that some individuals can use their reasoning powers to disconfirm the claims of others, and all individuals feel some common bond or shared fate that allows them to interact civilly, you can create a group that ends up producing good reasoning as an emergent property of the social system. This is why it’s so important to have intellectual and ideological diversity within any group (..).

This short passage reminded me of a method I used some time ago to try to get the most out of a group of experts who were all convinced of the superiority of their own solution to the problem at hand:

2. Use parallel thinking to have members look at the problem from the same angle and then switch angles a number of times using six different ‘hats’.

Once you have put together a diverse group of people, engage in parallel thinking. This method has been perfected by psychologist and management thinker Edward de Bono. In his book How to Have A Beautiful Mind, he echoes Haidt and others in noticing:

Argument is an excellent method and has served us well. At the same time (..) it is unsophisticated. Each side makes a ‘case’ and then seeks to defend that case and prove the other ‘case’ to be wrong. It says, in short: ‘I am right and you are wrong.’

De Bono gives a summary of his highly effective way of looking at decision making processes (emphasis added):

  • The direction of thinking is indicated by six coloured hats, each of which indicates a mode of thinking. At any moment everyone is ‘wearing’ the same colour ? hat. That is what is meant by ‘parallel thinking’.
  • The white hat indicates a focus on information. What do we have? What do we need? How are we going to get the information we need?
  • The red hat gives full permission for the expression of feelings, emotions and intuition without any need to give the reasons behind the feelings.
  • The black hat is for ‘caution’ and the focus is on faults, weaknesses, what might go wrong and why something does not ‘fit’. [This is the classical argumentative mode we often find ourselves in, trying to disprove other people’s arguments.]
  • With the yellow hat the focus is on values, benefits and how something can be done.
  • The green hat sets aside time, space and expectation for creative effort.
  • The blue hat is to do with the organization of thinking. This means setting up the focus and also putting together the outcome.
  • The hats make sure that everyone is using his or her own thinking fully to explore the subject. If you want to show off you now do this by out-performing others on each hat.

Using the six thinking hats is a useful approach to cure confirmation bias. The subject is really explored and should defuse argumentative behavior. The actual quality of the arguments put forward (checked through the black hat) can benefit from a third thinking tool proposed by Garret Hardin in Filters Against Folly:

3. For every argument put forward use the black hat to check against Hardin’s concepts ‘literacy’, ‘numeracy’, and ‘ecolacy’.

For everyone to understand what is put forward, Hardin proposes to pass an argument through three filters, because:

In the universal role of laymen we all have to learn to filter the essential meaning out of the too verbose, too aggressively technical statements of the experts. Fortunately this is not as difficult a task as some experts would have us believe.

Questions we should ask ourselves to understand any argument are:

  • On ‘literacy’. What are the words that we are using? What do they mean? What do these words mean in reality, if we start working with these concepts?
  • On ‘numeracy’. What are the numbers? What do the numbers mean? What is the relative size of quantifiable factors? Are there scale effects? Can we attach words to the numbers in order to convey meaning?
  • On ‘ecolacy’. In ecological thinking (or systems thinking) we introduce time into the equation of the words and numbers used. If we pursue this action, tactic, or strategy, what will happen next? And what if keep repeating this? What are the effects over time? What could the perverse effects be?

Hardin stresses the importance of using all three filters:

The skills of Readin’, Writin’, and ‘Rithmetic need to be combined with an attitudinal checklist that asks if the best words have been used, if quantities have been duly considered, and if the consequences of time and repetition have been taken into account. The “bottom line” of an analysis needs to be subjected to filtration that is simultaneously literate, numerate, and ecolate. (..) We use the ecolate filter to ferret out at least the major interconnections. Every proposal of a plausible policy must be followed by the question “And then what?” Not until we have asked this question (and answered it to the best of our ability) are we ready to put a plan into action.

By way of summary: understand what confirmation bias is, acknowledge that any individual falls victim to it, and then apply the three thinking tools discussed in this blog. Now you are well underway to better decision making.

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3 Reasons to Use Science-Based Measures in Your Sustainability Report

planetary_boundaries_2015

In the Guardian, the case is made that current reporting practices on sustainability are a great waste of time. According to researchers, nobody actually reads sustainability reports. One of the main reasons being, that reports are impenetrable: they’re just too thick to get through.  The authors identified a number of issues with current sustainability reporting practices which could be the cause for this.

The main culprit: most companies do not have a good process in place to determine materiality. The outcomes of a materiality assessment determine which aspects are to be included in your sustainability report.

One thing researchers missed, which could address both their worry that ‘sustainability reporting has stalled’ and help further discussions on the materiality issue, is the use of science-based metrics in sustainability reporting. I see a number of frameworks arising that all seem to stem from Johan Rockströms’ famous article in Nature, called ‘A safe operating space for humanity’. The premise is beautifully simple:

To meet the challenge of maintaining the Holocene state, we propose a framework based on ‘planetary boundaries’. These boundaries define the safe operating space for humanity with respect to the Earth system and are associated with the planet’s biophysical subsystems or processes. (…) Many subsystems of Earth react in a nonlinear, often abrupt, way, and are particularly sensitive around threshold levels of certain key variables. If these thresholds are crossed, then important subsystems (…) could shift into a new state, often with deleterious or potentially even disastrous consequences for humans.

In short:  we need boundaries – sufficiently underpinned by science – for Earth’s relevant subsystems and processes to continue using the Earth for our resource needs. Boundaries do have to be properly translated for use in existing models (such as the Global Reporting Initiative’s G4 Guidelines). Also, the boundaries must correspond with a firm’s size – as yardsticks against which to measure a companies’ sustainability effort.  This gives us the ability to benchmark a company’s progress against the reality in which it operates. A number of science-based frameworks are already adopted by some of the world’s leading companies on sustainability, e.g. Science Based Targets (Coca-Cola, Dell and Carrefour among many others), One Planet Thinking (Eneco) and Context Based Sustainability (Ben & Jerry’s).

I give you three reasons why your business should include science-based measures and boundaries in its non-financial or sustainability report.

1.     Make your report more relevant by showing your relative impact

The Guardian argues that most sustainability reports do not really invite us to continue reading. I tend to agree. Just pick-up a random sustainability report and you’ll be sure to get lost in tables, charts, figures, and the ubiquitous pictures of smiling, happy people. You immediately wonder how you should put together all these stats and figures to reach a conclusion on the companies’ sustainability efforts. Or, what I often ask myself: why do the things this company does towards sustainability matter at all? What is their impact if you would compare this to the size and scale of their value chain? By including science-based measures and boundaries, you show what your firm is achieving against objective yardsticks. In turn, it’ll make your sustainability report more relevant and credible to your stakeholders and investors.

2.     Show that your business is not ‘greenwashing’

Sustainability reporting is still often seen as a greenwashing operation. Although a claim of greenwashing is actually almost always too severe an accusation considering the definition of that word – ‘misleading information disseminated by an organization so as to present an environmentally responsible public image’ – I hear the term a lot when talking about the sustainability efforts of organizations.

I believe that the term greenwashing is used by the general public, because it is difficult for companies to understand which elements to focus on in their sustainability reporting. This leaves space for stakeholders to wonder about all of the sustainability elements companies chose not to include.

In the article ‘Raising the Bar on Corporate Sustainability Reporting to Meet Ecological Challenges Globally’, the United Nations Environmental Program raises similar doubts about the effectiveness of sustainability reports:

(…) the quality of these reports is insufficient to represent the full impacts of a company’s use of resources and materials on the environment and on communities.

And:

“Corporate sustainability reporting needs to be rapidly elevated from focusing on incremental, isolated improvements to corporate environmental impacts,” said Arab Hoballah, Chief of UNEP’s Sustainable Cities and Lifestyles Branch. “It should instead serve to catalyze business operations along value chains to achieve the kind of transformative change necessary to accomplish the Sustainable Development Goals and objectives by 2030. This is precisely what is needed to encourage countries and companies to act effectively at their respective levels.”

Moving towards more contextual-based reporting – i.e. taking into consideration both boundaries and the impact that is expected from your organization in respect to its size and span of your value chain – will surely make your organization less susceptible to charges of greenwashing and will make your positive impacts (or the steps you take to mitigate negative impacts) clearer to your stakeholders.

3.     Safeguard your business against the Slippery Slope argument

Activist NGOs surely serve a purpose in raising important topics. However, their solutions might go a bit far at times. The way activist NGOs attack businesses often reminds me of something Theodore Dalrymple wrote (on an entirely different topic but the words resonate):

I was still of the callow – and fundamentally lazy – youthful opinion that nothing in the world could change until everything changed.

Hardin, in his magnificent Filters Against Folly, called this the Slippery Slope argument:

The punch line goes by many names, among which are the [The Camel’s Nose,] Thin Edge of the Wedge, and the Slippery Slope. The idea is always the same: we cannot budge a millimeter from our present position without sliding all the way to Hell. (…), the fear of the Nose/Wedge/Slope is rooted in thinking that is wholly literate and adamantly antinumerate.

Hardin goes on to call this the demand for absolute (or extreme) purity:

The greed of some enterprisers in seeking profits through pollution is matched by a different sort of greed of some environmentalists in demanding absolute purity regardless of cost.

And:

When costs are paid out of a common pot, extreme purity in one dimension can be achieved only by impoverishment or contamination of others. Trying for too much we achieve less. Rational limits must be set to every ideal of purity.

Thus, Hardin states that everything that we do will lead to some unwanted consequences. Our actions need to be analyzed with the right terminology (‘literacy’), but, on top of that, we will also need the right measures (called ‘numeracy’; for more on these very useful terms, also see my blog The Business Case for Non-Financial Reporting).

Numeracy doesn’t just mean quantifying things; it means making the numbers relative to certain boundaries that give the numbers meaning. Using science-based measures to show the performance of your business towards certain boundaries or limits makes for a compelling argument to counter any Slippery Slope argument. In a way, what you are doing is making both ‘purity’ and ‘pollution’ more relative. Now, it can be measured and actions can be discussed and taken more objectively.

By way of conclusion: moving closer to a world we want

I have given you three reasons why you should consider moving towards science-based measures and boundaries in your non-financial reporting. As I already argued in a previous blog post, see Beyond Shareholder vs. Stakeholder Value, a firm’s main purpose is to provide maximal value to the economic system, but it should do so by adjusting to changing stakeholder demands. I believe moving to science-based measures and boundaries is the next step in these stakeholder demands and could take non-financial reporting to the next level, benefiting both companies (through the three reasons I gave you) and society as a whole (by introducing planetary boundaries).

Including science-based metrics will not solve everything, but let us see it as the next step and acknowledge that we cannot solve all issues at once. To paraphrase Theodore Dalrymple, moving forward, let us be:

realistic without being cynical, and let us be idealists without sounding like utopians.

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