Rational Decision Making: The 7-Step Process for Making Optimal Choices
In today‘s fast-paced, complex world, the decisions we make have higher stakes than ever. According to a McKinsey study, the average adult makes over 35,000 conscious choices every single day. In business, just one poor decision can cost a company millions, alienate customers, or even lead to complete failure.
It‘s no wonder that 71% of executives say their leadership team struggles to make decisions appropriately and quickly. We‘re all fighting against an instinctive tendency to go with our guts, but in reality, emotions lead us astray. Purely intuitive decisions achieve the desired outcome only 20% of the time.
The solution is implementing a rational decision making process. By following a systematic framework to logically evaluate choices, we can make consistently sound decisions that lead to better results. One study found that organizations which apply rational decision making models achieve their goals 85% more often and see 25% higher growth.
What Is Rational Decision Making?
Rational decision making is a step-by-step approach to identifying problems, gathering information, generating alternatives, and choosing the optimal option that provides maximum benefit. The process aims to minimize subjectivity and assumptions, instead relying on data, facts, and careful analysis.
There are many specific rational decision making models, but they all aim to help the decision maker choose the best solution from multiple options under the assumption that the individual will make a choice that maximizes their advantage.
Rational choice theory traces its roots back to the 18th century and the work of economist Adam Smith. In more recent decades, psychologists, economists, and management experts have continued to refine systematic approaches to making optimal choices.
The rational model stands in contrast to intuitive decision making, which relies more on instinct, emotion, and subconscious thought patterns. While intuition draws on our past experiences, it also falls prey to numerous cognitive biases that can lead us to wrong judgements. Rational models reduce those biases to make decisions more objectively.
The 7 Steps of the Rational Decision Making Process
While different fields and organizations may use slightly different steps, the general rational decision making process typically follows these seven steps:
- Identify the problem or opportunity
- Gather relevant information
- Generate multiple alternatives
- Evaluate each option based on specific criteria
- Select the best alternative
- Implement the decision
- Evaluate the results and adjust if needed
Let‘s examine each step in more detail:
1. Identify the Problem or Opportunity
Every rational decision starts by clearly defining the issue at hand. This could be a current problem that needs solving or a future opportunity to pursue.
For example, imagine an ecommerce company is experiencing a high rate of shopping cart abandonment on their website. The problem statement might be: "40% of potential customers exit our website after adding items to their cart without completing the purchase, resulting in $50,000 per month in lost revenue."
Crafting a specific problem statement aligns the team on the challenge to solve and desired end state. A vague statement like "our conversion rate is bad" doesn‘t provide clear direction.
2. Gather Relevant Information
With the problem or opportunity clearly defined, the next step is to gather data that will help generate and evaluate possible solutions.
The ecommerce company would pull website analytics to understand where in the checkout flow customers are dropping off. They would also gather customer feedback about their purchase experience and conduct user testing to observe sticking points. Competitor benchmarking could reveal how their conversion rates and processes compare.
This step may require significant research, from internal data analysis to market surveys to reviewing academic literature. Consulting subject matter experts can fill knowledge gaps.
The goal is to ground decisions in facts and data, not just opinions or assumptions. McKinsey found that companies which use data-driven decision making are 23 times more likely to acquire customers and 19 times more likely to be profitable.
3. Generate Multiple Alternatives
Armed with a foundation of relevant information, the next step is to brainstorm multiple potential solutions. The rational model emphasizes generating numerous options before evaluating them to avoid overlooking a strong choice.
Based on their research, the ecommerce team might come up with solutions like:
- Implement a guest checkout option that doesn‘t require creating an account
- Offer free shipping or other incentives
- Send abandoned cart emails to customers
- Streamline forms and reduce clicks required to complete a purchase
- Provide more payment options like PayPal and Apple Pay
- Add trust signals like customer reviews and security badges
Strategies to generate creative alternatives include brainstorming, mind mapping, lateral thinking, and design thinking exercises. The goal is to surface diverse ideas, not just the first decent option.
4. Evaluate Each Option Based on Specific Criteria
With multiple alternatives on the table, the next step is assessing each one rationally to surface the top contenders. This combats our natural inclination to just go with our gut instinct or default to the most familiar choice.
Evaluation criteria will depend on the specific decision being made. Common universal factors include:
- Cost to implement
- Expected benefit
- Feasibility
- Risk
- Alignment with strategic priorities
- Impact on stakeholders
Continuing our example, the ecommerce team would estimate the cost to implement each solution, the projected conversion and revenue increase, the level of effort required from their technology team, and the impact on the customer experience. They would prioritize solutions that require minimal effort but will have a major positive impact based on their research.
A common tool for rational evaluation is a decision matrix. List each option as a row and each criteria as a column, rating every combination on a set scale. Tally up the scores to surface the rationally strongest choices.
An example decision matrix evaluating solutions to reduce shopping cart abandonment. Source: Corporate Finance Institute
5. Select the Best Alternative
After rigorously evaluating the options, the next step is to simply choose the highest scoring alternative from your analysis.
Avoid second guessing the rational process and undermining it with subjective opinions. Recognize that your systematic assessment surfaced the optimal solution, even if it wasn‘t your initial favorite.
The ecommerce team would move forward with implementing a guest checkout and abandoned cart email campaign, since those solutions had the highest cost-benefit scores.
6. Implement the Decision
A decision is only as good as its execution. Establishing a clear action plan to implement and communicate the course of action is crucial.
The ecommerce team would need to coordinate across their web development, marketing, and customer service departments to roll out their chosen solutions. A project manager should oversee task and timeline tracking to ensure the decision is carried out as intended.
Change management is also key, especially for high-impact strategic decisions. Explaining to all stakeholders why the decision was made, what their role is, and how it will benefit the organization boosts buy-in and adoption.
7. Evaluate the Results and Adjust if Needed
Implementing a decision doesn‘t mean the process is over. The final step is to measure the actual results and compare them to initial projections.
The ecommerce team would track their conversion rates and revenue in the months after launching a guest checkout and abandoned cart campaign. If their abandonment rate doesn‘t fall as much as expected, they would need to investigate why and potentially try another solution.
Successful organizations view decisions as experiments to learn from, not permanent commitments. Rationally evaluating outcomes leads to continuously improving future decisions. Jeff Bezos attributes Amazon‘s massive growth to this approach: "If you‘re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure."
Overcoming the Challenges of Rational Decision Making
While the rational decision making process is logically sound, it‘s easier described than done. Humans are emotional, biased creatures who struggle to be perfectly objective.
Common challenges include:
- Falling for cognitive biases like anchoring, confirmation bias, and availability bias
- Lacking complete information
- Facing uncertain, quickly changing circumstances
- Needing to balance stakeholders with competing interests
- Simply not having the time to thoroughly work through every step
However, by being aware of these challenges, we can consciously work to minimize them. Tactics to make your decision making more rational include:
- Inviting diverse perspectives to provide objectivity and fill blind spots
- Using data to combat assumptions and biases
- Making decisions collaboratively so no one individual‘s emotions dominate
- Establishing objective criteria and a systematic process before diving in
- Timeboxing decision making to avoid overthinking and analysis paralysis
Renowned psychologist Daniel Kahneman sums it up well: "We‘re fundamentally overconfident in our opinions and our impressions and judgments. Intuition adds value, but there are many ways in which it also gets us into trouble. Using algorithms or rules to constrain human judgment will generally improve decision making."
While rational decision making models aren‘t perfect or universally applicable, they are immensely useful for making consistently sound choices. With practice, we can learn to balance logic and intuition to confidently make optimal decisions.
Commit to Rational Decision Making
In an increasingly complex world, we can‘t afford to rely on gut instinct alone. By adopting a rational decision making mindset, you can overcome emotional biases, break down big choices into manageable steps, and harness data to make consistently optimal decisions.
Start applying the rational process to an upcoming decision you‘re facing. Define your problem statement, gather relevant data, generate multiple solutions, evaluate them objectively, and create a concrete action plan. Notice how moving through the steps in order produces a more logical, rigorous outcome than just going with your initial hunch.
If you lead a team, consider implementing a defined organizational decision making framework. Aligning everyone involved around a shared process saves time and improves decision quality. Some of the most successful companies in the world like Amazon, Google, and Toyota use highly rational, data-driven decision making approaches.
Commit to making your decision making more rational, one choice at a time. As you strengthen this skill, you‘ll find yourself making fewer regrettable decisions and generating better solutions to problems. You‘ll be able to look back on choices made and justify them clearly based on facts and logic.
We‘ll leave you with this powerful quote from Thomas Sowell: "There are no solutions. There are only trade-offs." By evaluating those trade-offs through a rational lens, we can ensure the decisions we make have the best possible payoffs.
