The most important lesson in decision-making

- I am so happy that you're watching this video, because if you watch just this one and none of the others, frankly, that's okay; this is the most important one. We're going to cover the most important concept in decision analysis, the difference between a decision and an outcome and why outcome bias is such an important thing to watch out for, why a good decision maker avoids outcome bias, and why outcome bias, unfortunately, is one of society's favorite forms of mass irrationality. So first, what is a decision? It's more than a choice between options. It is an irrevocable allocation of resources. Now, those resources might be money or physical actions. It might also be giving up an opportunity. So you might be able to choose between two things, and it costs you nothing to do that. But once you choose one, the opportunity to choose the other one goes away. So that's an irrevocable allocation of resources. An opportunity is a resource too. What is an outcome? An outcome is something different from a decision. An outcome is how things turn out later. So it's possible to make a good decision and have an outcome that's not so good as a result. So let's take a look at an example. Imagine that we're playing a little game, and at the beginning you have a choice, a decision to make. Are you going to play the game with the coin and ignore the die? Or are you going to play the game with the die and ignore the coin? Here's how the coin game works. This is a coin that has yes and no rather than heads and tails. And if the coin comes up yes after I flip it, then you'll get $100, zero otherwise. Meanwhile, with the die, if it lands on a six, you will get $100, zero otherwise. So you have the choice between the game involving the coin and the game involving the die. If you think the coin is the better game, you're right. This should be a no-brainer. You have 50% chance to win. That's one out of two options. So 50% to win, and here you have only a one out of six chance to win. The coin is clearly superior. Good choice, great decision that you made there. Now imagine this plays out and we get to see the outcomes. And unfortunately, we were unlucky. The coin comes up with a no and the die comes up with a six. In that situation, bad outcome if you played on the coin. You would've had a good outcome if you played on the die, even though your decision was a great decision. But if you're reacting to this with like, "Oh no, I should have played the game with the die," no, no, absolutely not, you shouldn't have. You made a great decision by picking the coin. The die would've been the bad decision. And the danger here is if you're sensitive to outcomes if you show outcome bias, then you're going to learn the wrong lesson here, and next time you'll play the die game instead of the coin game. With a fair die and a fair coin, you should play the coin game every time. And in the long run, you will end up having more great outcomes than bad ones. But if you learn the wrong thing from this situation where you had an unlucky outcome, you might end up choosing the die, choosing the worst decision next time. Don't be oversensitive to that outcome. An outcome has two components, the quality of the decision that went into it and randomness. Think of that as luck. Luck isn't something you have any control over. But in many complex situations in life, there is that randomness component. If all you observe is the outcome and you don't get to see anything about what was known at the time that the decision was made, then you'll end up either punishing or rewarding people for a combination of luck and decision ability. And you don't know how much of that is luck. Maybe most of it is luck. So the people that you promote, the people that you put on a pedestal, are they simply lucky or are they making good decisions?