Probabilistic decision making

You make decisions on a variety of matters all the time, either consciously or subconsciously. Some of them are important, others trivial. Each of these decisions leads to outcomes that are either favourable or not. As you make these decisions, you realise that you have never had the luxury of complete information to make the best possible decision. You wish you had more data, more information, more insights, more time to decide, but the real world doesn’t offer you this. All decision making is always under the aegis of uncertainty. We have to decide with whatever information we have at hand and make decisions in a timely fashion. Higher the level of uncertainty we face, the lesser control we feel we have over a situation. This typically makes us very uncomfortable and threatened. As you can imagine, making decisions in such a frame of mind cannot be easy or optimum. To never find ourselves in such situations, we need to deal with uncertainty a lot better. 

This is where probabilities and probabilistic thinking comes in. When you evaluate all available information to make any decision, you don’t just guess randomly. You typically assess potential risks and upsides to ensure your final decision is the one that provides the best outcome. All you have to do is understand the various outcomes and the chance or probability of each of those outcomes coming true. You have to ask yourself questions like what else can happen? What can go wrong? What if it doesn’t play out the way you envisage it to happen? Once we know these outcomes and their probabilities of occurring, it is a simple task to arrive at the best possible decision. It sounds straightforward but is nigh impossible to achieve in reality. We cannot enlist all possible outcomes, nor can we assign probabilities to each of these outcomes with any high level of confidence. 

Probabilities are truly Janus faced. On the one hand, they are rooted in statistics and intertwined with laws of chance, and on the other, they are concerned with assessing your degree of belief in any matter in a very non-statistical manner. Even though we can work with probabilities in an excel sheet or on paper, it is convenient to work with probabilities in your mind. 

I first encountered probabilities in real life as I started learning chess. What if I play this move? What can be the opponent’s rebuttal? If this, then what do I do? If that, then what do I do? Chess forced me to think in probabilities. Humans think linearly and not probabilistically, and therein lies the biggest challenge. When confronted with a statement, we decide whether it is true or false, whereas reality can be very nuanced somewhere between true and false. When we meet someone for the first time, we either like them or not. As venture investors, we meet founders trying to assess the strength of their business plan and whether we should back them or not based on a host of objective and subjective criteria. As process-driven (Equanimity’s SPEED framework) as we like to think of ourselves, somewhere at the back of our minds is a voice trying to tell us already whether we will invest in this business or not. It takes utmost discipline and a deep belief in our process to quieten that voice till the deal runs through our entire process with all its rigour. One can only imagine how difficult it is for a jury to not fall into the trap of deciding whether an accused is guilty or not within the first few opening remarks. This type of decision making is hardwired into our brains and is a direct result of our evolution from cave-dwellers to modern folks. 

Changing from thinking linearly to thinking probabilistically needs a lot of hard work and effort. But I can assure you; it is totally worth it. It improves our odds of being right and makes us better decision-makers.

It is better to be roughly right than precisely wrong - John Keynes. 

Here are some steps that have worked for me and will certainly work for you:

Know it all. Really? 

You are not expected to know everything. Make yourself comfortable with these words: “I don’t know”, “I’m not sure”, “Tell me more about this”. Acknowledge the fact that you don’t know it all. It makes learning new things easy, adds to your overall knowledge base and helps you make better decisions when armed with more information than before. Thinking probabilistically mean you start assigning probabilities to all the possible outcomes you can think of. As you learn more, since you are keeping an open mind, keep updating the possible outcomes and assigning fresh probabilities to each outcome. Let’s be clear: this doesn’t have to happen on an excel sheet; it is alright if you do this in your mind. Importantly, avoid the pitfall of being sure about what is likely to happen and be open to the possibility that some other result, which you haven’t even considered yet, is also expected to play out. 

Uncertainty is part of life. Accept it.

You will never be certain about anything. Rather than making decisions without a process or just based on a hunch or gut, take the time to embrace this uncertainty and ask yourself: What else can happen? What else should I know before deciding? How likely is this to happen? Or that? The deeper you delve into the matter at hand, the more aware you become and with some practice, you will be able to operate under uncertainty like a master.

Results and process

We live in a VUCA (Volatility, Uncertainty, Complexity, Ambiguity) world and having a process goes a long way in making you a better decision-maker. Be aware that excellent outcomes can be a result of your good process or sheer luck. Ensure that as you go about making decisions probabilistically, you fine-tune your process to ensure excellent results are attributable to your decision-making skills and not just good luck.

Let's start off thinking in probabilities and make a habit of it. This is how we will win it.