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Monday, January 16, 2012

Good Decisions v. Good Outcomes

I'm often surprised at the confusion around good decisions v. good outcomes.  Like any good MBA, I like to think in terms of a 2x2 matrix. On one dimension we have Decisions and on the other we have Outcomes.  Either dimension can be either "Good" or "Bad."  So let's look at the four quadrants.

Good Decision, Bad Outcome: in this quadrant, you have made the best decisions given your situation, but nonetheless you had a bad outcome.  A classic example would be oil well drilling.  All of the geological data indicated that a particular place should be optimal for oil, but after spending $10M in drilling costs, you come up empty.  This quadrant I call "Life" because sometimes it just works out that way.

Bad Decision, Bad Outcome: in this quadrant you made a bad decision and you paid for it.  I like to call this quadrant "Justice."

Bad Decision, Good Outcome: in this quadrant you have made a foolish decision, yet had a good outcome.  While there are a lot examples of this in technology investing, the classic example is a Lottery winner. The expected value of a lottery ticket is less than its costs, so it is never a good economic decision to buy a lottery ticket -- even if you win.   I like to call this quadrant "Lottery."

So what about Good Decision, Good Outcome? In this quadrant, we'd like to think that it is our planning, innovation, and execution that translates our Good Decisions into Good Outcomes.  However, I like to call this quadrant "FBR" which stands for 'Fooled by Randomness.'  As Nassim Taleb teaches us, there is a lot of randomness in life and markets.  Perhaps those Good Outcomes aren't as tightly linked to our Good Decisions as we would like to believe.  Recognizing this randomness can help to keep us grounded during times of success.

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