Last month, I interviewed psychologist Daniel Kahneman, who won the Nobel Prize in economics in 2002 and recently authored the book Thinking, Fast and Slow.
Kahneman is one of the world's leading experts on the science of decision-making. So I asked an obvious question: Have any businesses impressed him for having systems in place to make good decisions? Here's what he had to say (transcript follows):
Dr. Kahneman: I think even within businesses there are some domains where they are acting rationally, and other domains where they may not be. So it's very clear, for example, that oil businesses have developed very good ways of deciding about when to drill, so they've worked that into a science, and there is a decision analysis, and I'm sure they're doing it well. There are other decisions that I'm not at all sure they're doing well. And so the more important, the more unique the decisions are, the more difficult it becomes to have a set of procedures that guarantee the best possible, I call that quality control over decision making.
I haven't counted, and I don't want to name them, but I haven't counted some venture capital firms that I think are doing a very good job of trying to think through their biases, and in picking businesses, and in picking start-ups. They have worked out what their errors are likely to be and what other mechanisms to control for these errors. This is feasible; it can be done. It's surprising, actually, how few organizations do that systematically.
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