Learning to see through flawed logic to make sound business decisions
It is a well documented phenomena, however flawed or impractical it may be, that humans tend to refuse to change their position on a topic even in the face of overwhelming evidence. An obvious example perhaps could be to look at outlandish conspiracy theorists, who submit claims such as the world being flat, and then refusing to deliberate or debate when presented with evidence to the contrary. That is not to say that every situation is quite so black and white, or that any given theory is without issue or holes (i.e. that unexplained element), but merely that for the most part, when someone has decided something to be the truth, very little can sway them from that decision. A favorite example that crops up from time to time is the anecdote of the two psychologists discussing the human propensity to dig in and not surrender their position.
"I'd like to believe," says the first psychologist, "that people do change their mind when given proper evidence to the contrary."
"You know, there have been multiple studies that show that is not the case. I have run two such experiments myself, and the results align. People don't change their minds, even with the right evidence" comments back the second psychologist.
Shrugging his shoulders, the first psychologist replies, "Well, I'd still like to believe it."
The irony, so thick it could be spread on bread like peanut butter, is that we all inherently believe that what we think is right, and any evidence to the contrary must be incorrect. Similarly, "evidence" that does not actually correlate to our theories, and only corresponds, is often taken as solid proof of our correctness and serves to reinforce our viewpoint, independent of its correctness. Even our esteemed psychologist in the example, dismisses established and documented experiments completely disbarring his belief. This tendency to ignore the facts in favor of maintaining our world-view may be an ingrained nature, but for the business owner and entrepreneur, it is a dangerous method to operate by.
The first step in recognizing if you are ignoring facts surrounding your business practices or the state of your business is simply to become cognizant of the possibility that you are. To quote Donald Rumsfeld (the US Secretary of State for Defense) "[t]here are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns - there are things we do not know we don't know." Understanding and recognizing confirmation bias is the first step because it moves us from the unknown unknown and into the known unknown. We, as a business owner, might not know if we have a confirmation bias that is restricting or limiting our growth and success, but if we at least acknowledge the possibility of it, we eliminate the worst-case scenario of operating with one unknowingly. With an eye to introspection, and a conscious analysis process in our decision-making, we can move to step two.
The foundations of logic, in philosophy, are ultimately built upon the notion that there are inherent or irrefutable truths, and every other truth can be determined by ensuring a theory operates within those truths. These truths, the proverbial Lego bricks of all other truths, are sometimes referred to as First Principles. And, while there are certain 'truth bricks' that can be used in every situation, others are more specialized in determining the theory at hand. In our case, our 'truth bricks' come out of an understanding of the market, the economy, and the customer. We are aware, from step one, that some of our assumptions and beliefs may be flawed, and so the challenge is to take our 'truth bricks' and build a proof that these beliefs make sense. More specifically, the business owner must use these bricks to justify business decisions and actions, to prove to himself (and perhaps his staff) that their current course of action is logical.
Step three, then, is to take any given assumption, and put it to the test. Yet, challenging every single business practice or process one by one is not an efficient or effective use of executive-level employee time; it is not an effective use of your time. Some assumptions, some beliefs, some practices, are just too small and inconsequential to examine when there are, to borrow a proverb, bigger fish to fry. Instead, start with assumptions that uphold the foundation of your continued growth and success. As an example, we can use a spin-off of a business BMI recently helped. Bob (not to be confused with the ostrich of a few articles ago) runs a fairly successful business that produces a fairly commonplace widget out of two different locations. It's the kind of industry where producing this widget draws in both small competitors, such as Bob's small mom-and-pop-shops, all the way up to large, multi-franchised enterprises. Business for Bob was growing steadily, as it had for many years, but he was starting to reach the maximum capacity he could output, and asked BMI for suggestions. When BMI looked at Bob's business, there was no confirmation biases or underlying assumptions; BMI was an outsider that had no industry experience and so had no preconceived notions of how businesses in this industry must (or must not) operate. BMI did, however, have the 'truth bricks' that every business must use to make sense of their business decisions.
Bob had two locations, functionally identical, and BMI was not sure why. As is often the case across many industries, rent and building expenses were by far and large the biggest cost, but having no industry experience to explain why, BMI challenged Bob to justify the second location and added expense. The first reason given was that every other competitor strove to have as many locations as possible, so Bob had done so too. To that end, Bob re-invested much of the money his first location earned back into the second location, and proudly believed it was a solid financial and business decision. Ad Populumis the logical fallacy known as the "argument of the masses," that is to say, an argument that attempts to prove the validity of a theory or claim based on the fact that others believe it. Ad Populum is not a 'truth brick' and falls apart under any scrutiny (if everyone started saying 2+2=5, that would not change the truth of the mathematical equation, everyone would simply be wrong). Bob could not justify his decision simply by saying it was based on everyone else, as that does not have merit unto itself. There is, of course, the possibility that everyone else is doing something because it is logical, and so following indirectly makes the decision logical, but that is suspect logic at best.
The next attempt at the second location's justification came from a derivative continuation of the first argument: everyone else in the industry opens as many locations as possible to provide the most convenience to the widest range of customers. Bob had found a more basic brick to use to justify his secondary location, but it was not a 'truth brick' yet. Convenience of location can be a critical decision for a customer choosing a vendor, but to claim that it is sufficient logic to justify a second location is still a logical fallacy, the fallacy of the converse. Bob's logic was framed as:
Customers choose convenience;
My second store provides convenience;
Therefore, customers will choose my second store.
The statements unto themselves may not be incorrect, but there are easy enough arguments against the statements to force the conclusion to be suspect. Is convenience the only thing customers are choosing? Does Bob's second store actually provide convenience? Does Bob need the second store to provide convenience, or can the convenience be provided in another way? The required 'truth bricks' to support these answers are absent, and so Bob's second justification cannot stand.
Bob's third and final attempt at the second store's justification was even more fundamental: holding the variables of price and turnaround time for his widgets constant (as he had evidence - truth bricks - that he could compete within the industry for the same prices and the same speed), the only factor left to compete on was convenience. Therefore, Bob said, having less locations made him less competitive, as customers would choose the most convenient location, knowing the price and turnaround time was the same everywhere (plus or minus). A fantastic argument, far cry from where Bob started, that starts to broach a business strategy built on our 'truth bricks.' Bob, however, made one more assumption in his statement that fails under scrutiny: customers, in their efforts to choose convenience, must pick a location. The industry, as a whole, had decided that locations determined convenience; a preconceived notion that Amazon has proven beyond a shadow of a doubt to be fundamentally wrong. Customers will pick whatever location is most convenient, holding all else constant, but that does not mean customers will pick a brick-and-mortar store anymore. The most convenient location may just be, as Amazon discovered, sitting at home, at a computer. Amazon took what was believed to be a known known, and questioned it at the most fundamental level, looking at the belief as an unknown unknown. By forcing themselves to build proof of the current business status quo with their own truth bricks, they discovered that the business principle was actually founded on flawed logic. Granted, the logic held true for many years, before such rapid technological advances, but what was once a sound business principle became outdated.
The metaphor of Lego bricks being the truths that we can build logical business decisions upon has a secondary effect too. Like observing the brilliance of several young children attacking a messy pile of unbuilt Lego bricks, there are several vastly different masterpieces that can come of the same core bricks. Yet, each masterpiece is within the bounds of what the bricks themselves (and in some cases, physics) will allow. Similarly, our business truth bricks only put certain requirements or restrictions on what we cannot do, but they do not railroad or dictate what we can do. The same business bricks that built the Ford motor company built Amazon, built General Electric, built Telsa, built YouTube, and so many other massive scale companies. They have built countless small businesses that constitute the majority of the world's economy, and have since commerce has been in existence. The masterpieces built from the bricks changes and evolves constantly, and occasionally even introduces a new brick to play with, but solid logical thinking and rational decision-making will always be the foundation for a successful business. Just remember to go back to playing with your truth bricks every once in a while, and see if you can create a new masterpiece; you'll either reinforce your masterpiece as such, or create a newer, bolder, grander one.
(Author's note - Whatever happened to Bob? Unfortunately, Bob took the route of the second psychologist, and decided that despite not being able to justify his business decisions with logic, he would leave his second location open. He has since had to close it, and all his investments in it are gone; operating on an assumption that could not be supported by the 'truth bricks' was an expensive mistake.)