Can Craving for Certainty Cause Bad Business Decisions?
By Jackie Luo, TCV Growth Partner -
On Sep. 21, the Federal Reserve Board raised the interest rate by 75 basis points, following a few consecutive raises earlier and as expected. The media, instead of digesting the action, immediately started to predict the next move. In the press conference following the announcement, reporters repeatedly asked Federal Reserve Chairman Jerome Powell how many more increases are planned for remainder of the year. Powell, in his precise choice of language, stood his ground by saying it depends on the economic indicators in the next months. In other words, he is not certain how many more the interest rates will be increased. The reporters apparently were very frustrated. They knew their readers and listeners wanted predictions. No matter how highly unpredictable these things are, people want them.
Craving for certainty is human nature. Despite of the unpredictable nature of life’s events, we still want to ascertain “probability” of various events. In the financial markets, we have data on the probability of the amount of interest rate increase in the next FOMC meeting and that probability is updated real time. But how much valuable is the knowledge of the changing probability? How accurate is using historical data to predict future events?
According to Nassim Nicholas Taleb, the author of the famous book “The Black Swan”, using historical events to predict future is mostly a futile effort, and highly inaccurate. The phrase “black swan” is synonymous to an “unpredictable and highly unlikely event”. However, when Taleb was interviewed by journalists, he was often asked the question, “What are your top 10 black swans for the next 10 years?” Taleb’s answer was “I don’t know”. Black swans are, by definition, unpredictable events, yet people still want to hear the prediction.
Craving for certainty is an innate driver for most of decisions we make in our daily lives. For example, we buy all kinds of insurance products, health insurance, life insurance, and insurance for our homes, because they eliminate uncertainty. Most of us prefer full-time employment rather than taking risks in entrepreneurship because we want steady paychecks. As an individual, how you make your own life decisions only affect you. However, if you are running a business, how you make business decisions can impact the growth trajectory of the business. Depending on the value of the business, the risk for making the wrong decision can be substantially higher. For example:
1. When hiring people, you may rely too much on “experiences of having done similar things”, assuming past record will predict future success. However, with the changing competitive environment, and evolving products and services, past success can’t reliably predict future performance. So hiring someone with past similar experiences doesn’t necessarily improve the success rate.
2. When your product has reached a mature stage in an existing customer segment, it’s time to search for another growth area. But you keep delaying that action; perhaps you are afraid of the uncertain nature of developing new businesses.
3. A key executive in your company is not working out. But you are afraid of making the separation because you don’t know when and whether you can find a replacement that is a better fit.
Building a successful business involves making more good decisions than bad ones. If we can identify our tendency to make certain types of bad decisions, we can increase the odds of success. Next time, when you are making a decision for your business, ask yourself, “Is this the best decision for the business, or am I making this decision to avoid uncertainty?” Hopefully you will become better and better in making decisions.