Are there two extreme approaches to numbers, with little grey area in between? On one hand, we buy lottery tickets, even though the odds of winning are decidedly against us. On the other hand, we believe much of the information that is presented to us on a daily basis without much further analysis. MIT recently did a study where respondents believed false information more than real information in various business, social and political situations.
Some people believe that emotions are very important, and that relevant statistics and numbers pale in comparison. In his book “Messy”, Tim Hartford argues that disorder is a great tool to encourage innovation and creativity and that emotion, passion, and intuition need to be a part of decision-making.
However, analytics can also offer great opportunities to support our intuition. Marketers are getting better and better at predicting when, where and how consumers will buy things. For example, lower prices and greater selection are rapidly causing consumers to switch from retail stores to the internet. Similarly, the population of people over 65 will increase from 14% in 2012 to over 22% by 2060, and this will have a dramatic impact on consumer purchases.
Here are five recommendations to improve the balance between intuition and analytics:
1. Use valid data and reputable sources
It may seem obvious, but using valid data from reputable sources is critical to effective decision-making. I once managed a company where we were growing at rate of over 20% a year, and we completed an expensive market research study that estimated the market at over $1 billion. After a few years, we started to slow down, and we realized that our assumptions about who would buy our product were highly exaggerated. We loved the findings so much that we did not bother to evaluate them.
Questions like measuring the right market and segment, estimating market growth, and assessing competition can affect the validity of any analysis.
2. Be aware of information bias
Business decisions are made by accumulating data and analyzing information. How this information is used (or ignored) can be devastating to a business. For example:
- Seeking information that supports our favored hypothesis and avoiding information that contradicts it.
- Giving preference to positive information and ignoring the details. For example, we frequently develop huge general market estimates that ignore the specifics of our target.
- Looking for winners (especially in describing startup success stories) and ignoring the failures.
- Ignoring negative evidence. In particular, the more invested we are in a project or product, the less we are willing to abandon it and cut our losses.
Small businesses tend to focus on universal answers to problems and simple solutions. However, we know that issues are more complicated, and each business needs its own customization. One-size-fits-all solutions are easier to understand and technologically easier to execute. However, if you realize some of the complexities involved, then it can be easy to adapt them to individual situations.
3. Consider risk and probability
While we can praise intuition and analytics, risk and probability are also key factors in the process. Consider the following:
- Buying a lottery ticket has minimal risk because of the low cost and high potential reward. In contrast, ignoring medical problems can have very high risks and very unfortunate consequences.
- Decisions and risk are also greatly affected by probability and information. It is much easier to predict results where there is significant and consistent historical data. However, predicting results for new programs that have little (or inconsistent) data becomes much more difficult.
- We generally are overly concerned with the consequences of mistakes than the potential reward of risk. This approach is well stated by Sheryl Sandberg in her comment: “What would you do if you weren’t afraid?”
Another concept related to risk is our aversion to losses. One of my management principles has always been “If you aren’t making mistakes you aren’t trying hard enough. . .”
4. Focus on how change and technology can affect analytics
Businesses have multiple goals and realities. Many entrepreneurs are so excited with the idea of becoming the next Mark Zuckerberg that they completely ignore the need to execute their plan and make a profit.
There are many factors that contribute to a successful business and increase the overall profit margin, such as skills, success, and sound financial planning. Also, the business owner needs to consider the environment, safety, and social trends.
The sharing economy (with companies like Uber and Air B&B) are rapidly growing. Traditional suppliers need to recognize the speed, price and cost advantages of these structures and learn to compete. The environment and culture are dramatically changing and they need to understand and react.
5. Be open to measurement and feedback
Organizations need to be open to measurement and feedback. The first step is understanding financial, operations, and sales reports. Management efforts such as asking employees, “How am I doing? Is there anything you need?” can be priceless.
Trying to balance intuition and analytics can produce dramatic results:
- The greater the certainty, the more analytics can improve decisions. The greater the uncertainty, the more intuition is necessary to at least develop alternatives.
- Intuition is essential in developing ideas and hypotheses. In contrast, analytics can be especially useful in analyzing results and developing new modifications.
- Remember the analytics are only as good as the least reliable variable. You need to understand the dynamics of how volume, price, and profit interact with marketing models. You can’t make it up with volume if you lose money on every transaction.
- Avoid denial. We ignore bad news Beware of personal bias and seek to minimize it. When you go into an experience, it’s only human to assume that a certain result is going to occur. Be careful, though! It’s easy to interpret data in a way that supports your preconceived notion,
- Develop simple models like our profitability model (click here) that allow you to analyze the interaction of various factors with different intuitive alternatives.
In summary, understanding the use of analytics and intuition can greatly enhance your decision-making process. The most important thing is not to be afraid of or obsessed with analytics. As George Bernard Shaw said, “The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.”
Dr. Bert Shlensky has an M.B.A and Ph.D. from the Sloan School of Management at M.I.T. He is the President of the New York-based consulting firm The Startup Connection, where he uses his 30 years of high-level business experience to guide his clients towards maximum sales and profit. For a free consultation, please visit www.startupconnection.net.