What happens when decisions go wrong?

Does this excerpt from Dinosaur Brains: Dealing with All Those Impossible People at Work seem familiar?

When a decision goes awry, we tend to focus on the people who made it, rather than on the decision itself. Our assumption, which is really unwarranted, is that good people make good decisions, and vise versa.

Good decisions don’t always have a good outcome, just as bad decisions don’t always have bad outcomes. For example, if you are sitting at a blackjack table and happen receive an 18 on the first two cards, should you hit when the dealer asks as a courtesy? Let’s suppose you take that hit and the next card is a 3. You made a horrible decision but you lucked out. Worse, you might never know that you made a poor decision.

In Winning Decisions: Getting It Right the First Time, Russo and Schoemaker explain this concept with the following matrix:

In talking about this matrix, Paul DeDodesta, the Harvard stats wiz featured in Moneyball, writes:

We all want to be in the upper left box – deserved success resulting from a good process. … The box in the upper right, however, is the tough reality we all face in industries that are dominated by uncertainty. A good process can lead to a bad outcome in the real world. In fact, it happens all the time.

… As tough as a good process/bad outcome combination is, nothing compares to the bottom left: bad process/good outcome. This is the wolf in sheep’s clothing that allows for one-time success but almost always cripples any chance of sustained success.

This is where it gets interesting. If you can’t recognize when you’ve had ‘dumb luck,’ you’ll never be in a position to correct the way you’re making decisions. Eventually your luck runs out.

James March calls this the False Record Effect and it has implications on how organizations should promote people:

A group of managers of identical (moderate) ability will show considerably variation in their performance records in the short run. Some will be found at one end of the distribution and will be viewed as outstanding; others will be at the other end and will be viewed as ineffective. The longer a manager stays in a job, the less the probable difference between the observed record of performance and actual ability. Time on the job increased the expected sample of observations, reduced expected sampling error, and thus reduced the change that the manager (or moderate ability) will either be promoted or exit.

Luckily we can improve our ability to make better decisions:

Maybe executives in responsible positions should be required to keep logs, as sea captains do. After each decision, a manager would list his or her reasons for having made it and record how it turned out.

… Usually the only information we have about how and why decisions were made is in the self-serving memoirs of great managers, which leave us feeling that some people just have it and other don’t. But what is “it?” We have very little vocabulary for talking about internal thought processes. Decisions feel as if they jump fully grown from one’s head.

Daniel Kahneman advocates for recording your decisions as well.

An inability to distinguish good decisions from bad ones leads to a number of negative effects in organizations. One of which is that it discourages people from taking risks and encourages a cover-your-ass mentality.