Myth of rationality: Does regret impair your ability to make decisions?

“I knew that if I failed, I wouldn’t regret it, but I knew that the only thing I can regret is not trying,” – Amazon founder, Jeff Bezos.

We assume that people make emotional rational decisions. The Theory of Games and Economic Behavior written by John von Neuman and Oskar Morgenstein, published in 1947 is the classic on the rules of rationality.

Imagine you go into a shop for a sandwich and the lady behind the counter says she only has chicken or beef and you say, “Oh, let me have beef”. Then the lady says, “Oh, I forgot I have ham too.” You reply, “Let me change my order to chicken.”

You can’t be considered rational if you change your order just because you discovered they also have ham. Assuming that people are rational, financial markets should be as well.

The myth of rationality

The problem is that the idea of ​​the person described in the Economics 101 course – acting to rationally maximize his utility is a bit of a myth. (Utility is the satisfaction or utility of consuming a good or service.) When people make decisions, they are not passionate; emotions rule. This is the idea that led psychologist Daniel Kahneman to win the Nobel Prize in economics, con.

Rain dance or creating real insights?

Before you head off to your next business planning retreat, consider the thoughts of Dartmouth professor Brian Quinn who notes, “Much of the business planning I’ve observed is like a ritual rain dance; it has no effect on the weather that follows, but those who engage in it thinks it does.

Also, it seems to me that a lot of the advice and instructions associated with business planning are focused on improving the dance, not the weather.”

Is planning wrong? No, it’s just usually poorly done. Insightful strategic planning combines hard analysis with creativity, taking into account the turbulent business environment. Why do managers have this addiction to believing they can plan accurately far into the future? Maybe it’s the idea that they don’t want to regret the opportunity to “give it a chance”, even if they know, what they’re planning for, is unlikely to happen as they think it will?

Let’s imagine for the moment that there are two ways to do strategic planning analogically and go back to first principles. One is much easier than the other. These days, it would be easier to create a fairly polished business plan by accessing artificial intelligence and programs like Chat GPT. Whether it would have the buy-in of senior managers is another matter.

The strategy begins by addressing the real problems facing the organization. It doesn’t start with blue-sky notions of some (inevitably) brilliant visions and missions.

First principles thinking is one of the most effective planning methods managers can use to break down complex problems and create original solutions. It is also the single best way to learn to think for yourself.

First principles have been used by many great thinkers, including printing press inventor Johannes Gutenberg, military strategist John Boyd, and philosopher Aristotle. Based on his training in physics, Elon Musk has used first principles to think more effectively than most.

To avoid a sense of regret—that your strategic planning exercise was a waste of time, consider approaching problems with both a mix of analogy and first-principles thinking.

Forget doing the old tired SWOT (Strengths, Weaknesses, Opportunities and Threats) exercise, focus on being (figures and facts) analytical, use inductive logic, hypothesize what you think is happening and then do the objective research to prove it, or disprove what you think may be true.

Don’t try to be all things to all people. Strategy is about making trade-offs, about creating value along a chain of activities. What is the unique offer for customers and how do you price the offer? It’s about choosing what not to do, as much as what to focus on. This is not easy, it forces managers to question basic assumptions and conventional wisdom.

Avoid that feeling of regret. “Twenty years from now you will be more disappointed by the things you didn’t do than by the things you did,” said Mark Twain, an author.

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