Decision-Making Under Uncertainty: Key to Successful Startup Leadership
Decision-making under uncertainty is difficult. No sincere leader or successful business person will tell you otherwise, but most successful leaders in the startup or expansion stage marketplace have found a way to identify the minimum level of information necessary to make a well-thought-out decision on a regular basis and maintain composure while doing so.
The old adage that time is money is absolutely true, especially in the case of startups and expansion stage companies where one of their biggest assets is their agility and ability to fail quickly multiple times over before they find success. The key is finding the right moments to take risks and when to hold-off when you do not have enough information. Finding this balance maximizes the expected return on decisions.
The way to think about identifying the appropriate point to make decisions is to recognize that the value of information diminishes over time, so at some point the cost of collecting additional information outweighs the cost of collecting it to minimize risk. Identify that point and you will have determined the appropriate moment to make a decision. The chart below shows you the time-cost of information over time, and illustrates why decision-making under uncertainty is necessary to avoid the high costs of over-analysis.
There is no perfect rule for what constitutes enough information, and if you try to follow guidelines you are bound to fail because you will not be appropriately assessing each decision. Collin Powel suggests in his Laws of Leadership that the optimal level of information in most decisions is between 40% to 70%, and the remaining uncertainty should be left to your gut feelings. Although this is not a steadfast probability to make all decisions on, it does demonstrate that the most effective decision-making generally occurs when a significant amount of information remains unknown. Conversely, it also clearly demonstrates that some level of information will need to be known to effectively predict the outcome of a given decision.
Here are 3 additional key factors to consider regarding decision-making under uncertainty:
- Statistics and other methods of modeling can be used to infer additional information from a limited set of information and help you reach a comfortable level of certainty within a shorter period of time.
- Don’t let adverse facts stand in the way of making a decision. There will always be outliers and trying to account for all of them will lead to decision-making paralysis.
- Poor decisions are a fact of life and they will happen from time to time. Avoid having your ego so close to your position that when your position falls, your ego falls with it.
What startup and expansion stage managers should take from this is that a certain degree of uncertainty is healthy in everyday decision-making. If they are not attempting to make decisions while uncertainties still exist in the information around the decision, then they are waiting too long to make the decision and are probably not maximizing the expected value of each opportunity. That’s because gathering additional information costs time and money, which takes away from the potential outcome value of a given decision. It also leaves the door open longer for others to take advantage of an opportunity.
Successful decision-making under uncertainty is a skill-set that almost all startup and expansion stage managers need to develop to maximize their company’s opportunity for success.
If you are interested in learning more about startup and early stage business decision-making, I recommend watching Steve Blank’s video on quick decision-making in a startup. Similarly, if you are interested in learning more about startup or expansion stage leadership, I also recommend reading my colleague Tien Anh’s blog post on the do’s and don’t s of leadership at this stage of business.