Risky decision-making processes
Decision making under uncertainty is an often-discussed investment topic and can result in more complex, or simply more, mathematical models, forecasts, scenario analysis, etc. striving to quantify, replace, ameliorate and even try and remove uncertainty. This is a lot of hard work for all involved and intended to inform a decision; the way in which that decision is made can be risky in itself.
In real estate, at some point, decisions will end up in front of a person, or, more likely people, in the form of an investment committee. Investment committees are typically preferred as, in theory at least, the decisions made by a group can be better than those made by an individual. Whilst a great deal of time is given over to how things are done before the decision-making point, how the decision-making body makes its decisions can be largely forgotten about.
Luckily, there is a great deal that can be learnt regarding how (not) to make decisions, mostly based around the psychology of groups and how individuals act within them. A good starting point for this is the book “Groupthink”:
“Groupthink - the psychological drive for consensus at any cost that suppresses disagreement and prevents the appraisal of alternatives in cohesive decision-making groups”.*
One simple example of how a group dynamic can be altered from the beginning is for the leader of the group, typically the most hierarchically-senior person in the room, to state their views from the beginning. For example, “this one won’t take long, its a no-brainer” is possibly one of the worst ways to kick off the meeting. One of the worst ways to end the meeting is probably to ask the (rhetorical) question “so, this all sounds good, does anyone disagree?”
Instead, it is better for the hierarchically-senior person to keep their views to themselves and to enable a discussion that encourages different views and the full discussion of alternatives. Ideally, the hierarchically-senior person should observe, ensuring that the meeting is functioning as it should, and allow the group to make its own decision, only stepping in if absolutely necessary and typically only to ensure that the decision-making process is put back on track.
What, then, would be evidence of a good decision making body? One question that is often asked is “how many decisions that come to investment committee are turned down?” It is not wholly clear whether the correct answer to this is “none”, “a few”, “many”, “a lot” or “almost everything”. Indeed, it is not clear that it is a good question. Like many things, it is not obvious that the outcome is the best way to measure a process. The question should be directed at the process, asking about the features of that process and how the decisions are made. The aim is to discover whether the decision-making process itself gives rise to serious risks, the outcomes themselves can then be seen as the best decisions that could have been made.
To set up such a process in a time-pressured environment where speed of decision making and consensus may be spelled out as the aim, is not straightforward, but there are ways that the process can be structured to try and minimise the riskiness of the decision-making process.
* Janis, I, (1972) “Groupthink”