5. Decisions

What do entrepreneurs make? Well, what wemake is not a widget because our job is to hire someone to actually do thewidget thing. What we make in the long run is not a sale because what we do iswe hire someone to make a sale. What we make. Is decisions. The differencebetween good decisions and bad decisions is the history of every singleorganization.

[00:00:38] Think about a company likeNintendo, you have heard of Nintendo. Why? Well, the antenna was a strugglingplaying card company, and then the CEO made a decision. They made the decisionto enter the video game business. Decisions Nolan Buschnell ran Atari. Thecompany that proceeded Nintendo Atari was dominant.

[00:01:04] Every video game in the UnitedStates was spawned from Nolan, Bush, Nell's innovation and leadership. And yetthey're gone decisions along the way you go left. Oh, you go right. When I wasin business school at the tender age of 23, I went looking for a summer job andI was lucky enough to get an interview, to become assistant to the presidentfor the summer of the CEO of Activision Activision.

[00:01:33] At the time, this is after Atariwas the fastest growing company in the history of the world. They were makingvideo games as fast as they could. And I went to see him in his office. And Ibrought with me an article. I didn't really have the authority to be doinganything I was doing. And I said, Jim, I think Activision needs to make adecision that in addition to making video games, you should make computergames.

[00:02:02] Well, he got up to throw me outof his office and fortunately at the last minute, someone ran in with thebestseller list from cashbox magazine. Cashbox chronicled to best-selling videogames of the week. And he turned around and showed me that nine out of 10 ofthe top video games in America at 50 bucks each were from his companyActivision, and he forgot all about the fact that he's going to throw me outand he ended up offering me a job.

[00:02:26] I was unable to take. Thepunchline of the story is this. I was showing up with no authority and noexperience saying, I think you should make a different decision. And I waswrong. Activision ended up making that decision many years later and it workedout fine, but making decisions. That's what we do.

[00:02:46] Decisions about cashflowdecisions about structure, decisions, about scale decisions, about people,decisions. You get the idea. So I want to talk about some of the principlesthat are going to help you make better decisions. Here is the first one sunkcosts. Sunk costs are wildly misunderstood. Even people who understand themhave trouble ignoring them.

[00:03:11] So, what is a sunk cost? A sunkcost is something you paid for with time or money in the past, but if you don'tneed it anymore, it's gone. You can't get that time back and you can't get thatmoney back. It is a gift from the you of yesterday. So there are countlessexamples of sunk costs in our lives. If you spent years in architecture school,really slave to get in, really worked your way through it.

[00:03:38] And then. After you leavearchitecture school, it's a worldwide depression and you can't get any work asan architect. You could say, I have to protect my architect degree. I must bean architect and I'm willing to be unemployed while I wait. That's a choice. Oryou could say that architecture degree.

[00:03:58] That's something I got from myformer self. But no, thank you. No, thank you. There are new opportunities infront of me right now, new chances to level up new chances to be of service,new chances to build something. The fact that my former self showed up with anarchitect degree as a gift doesn't mean I need to accept it.

[00:04:19] So here's another example thatmight be closer to home. Let's say you've got five days worth of food in thefridge. Some of the things in the fridge are things that were really expensive,hard to get other things in the fridge, not so much. Okay. You got a call froma friend and he says, come, we're going on vacation for two weeks.

[00:04:37] It's all expenses paid. It'sfree. I'll pick you up in an hour. So you have time tea, one more dinner beforeall the fruit in your fridge has to go in the garbage. The question is. What doyou want to eat for dinner? Do you want to eat what you want to eat or do youwant to eat the food? That was the most expensive, the hardest to get?

[00:04:55] Because maybe you don't feellike eating that maybe you feel you get more pleasure out of eating somethingthat was fresher or cheaper or easier to have shown up. Obviously you shouldeat what you want to eat. You're throwing everything else out. Anyway, thatgift from your former self. It's done. You've already spent the time you'vealready spent the money.

[00:05:15] What this means as anentrepreneur is that all around us, we are busy defending our sunk costs. Youhave that machine, you paid a lot of money for that. You're still paying off,but there's a better, cheaper, easier way to do it. Well, then forget themachine. Walk away.

[00:05:35] I am not arguing that you shouldbe inconsistent. I am not arguing that you should not be loyal. I'm not arguingthat you should treat past efforts as something to be easily thrown away. Noneof those things are true because as you move into the future, You want areputation to yourself and to others as the kind of person who steady as thekind of person who's going to show up and do what they said they were going todo.

[00:06:00] This is about your internalnarrative. It's about realizing that decisions are about courting a path towardthe future. So if you've been in a car for six hours driving towards yourdestination and you discover. That you went the wrong way and the place you'retrying to go is behind you. I don't think it makes any sense to keep drivingjust to prove you were right in the first place.

[00:06:26] I think it makes sense to say,wait, that time I spent in the car, those last six hours they're gone. I can'tget them back. I might as well turn around and without being angry at myselfthat whole six hour time, just to get back to where I started, why not putthose six hours to use? Doing something productive.

[00:06:44] Instead, sunk costs are real inthe sense that you spent the money, but they must be ignored. We have to ignorethem because if we can't, we can't make a smart decision.

[00:07:02] Once you can get your armsaround the idea that sunk costs while real must be ignored. What you come torealize is there are two kinds of decisions that we make at work asentrepreneurs, as leaders. One of them are the short term decisions that areall about defending amplifying, moving forward, taking what we've already got.

[00:07:24] And making it work a little bitbetter. Those decisions you're probably pretty good at you do them all daylong. The second kind of decision is very different. The second kind ofdecision we have to decide to make no one shows up and says, what do you wantfor lunch with this kind of decision? This is a decision that no one is askingyou to make.

[00:07:49] In September of 1993, somethingextraordinary happened. The mosaic web browser was launched before that theworldwide web was hardly available to most people. Also before that four yearsbefore that I started one of the first internet companies. So for four years Ihad been building a company based on email working with online services, likeCompuServe and AOL, et cetera.

[00:08:18] And we had a small team, atalented team, and we were making it living pioneering how email and gamesonline could work. And the guy who sat near me, one of my employees, guy namedMark Hurst said, Hey, Seth, look at this. And in September of 1993, Mark showedme mosaic. And I looked at it and I said, well, that looks a lot like prodigy,but it's slower.

[00:08:43] And there is no business modeland there is no client. No. And for the next year and a half give or take, wedidn't develop anything for the worldwide web. We kept working in email. Wekept working with our partners and I missed it as a result. We didn't buildYahoo. We didn't build Google. We didn't build eBay and we didn't build Amazon.

[00:09:06] We didn't even register athousand really good domain names that if we had, would have made more moneythan almost anything we could have done, didn't do any of those things becauseI missed it. I didn't sit down and say, is this a moment to make a realdecision? Instead, what I said is I have a bunch of sunk costs.

[00:09:26] I have an operation that'srunning. How do I keep it running? Well, now there's a challenge here. Thechallenge is if you spend all day every day thinking about whether this is adecision moment, you're not going to get anything else done. So the art of thisis figuring out how to process what's going on in the outside world to match itto the scale you seek to achieve.

[00:09:52] The money and capital at yourdisposal, the customers you seek to serve the people you have on your team andwhat your organization even stands for to put them all together and say, whenis it time for us to decide, when do we need to make a new decision? Most ofthe time, the entrepreneurs I talked to, particularly ones who have recentlystarted businesses.

[00:10:16] Don't do this very often. Butit's essential because if the world wasn't changing, you'd be fine, but you arechanging the world and so are other people. And so since the world is changing,we have to figure out when is it a decision

[00:10:35] it's part of decision-making isunderstanding that decision-making is actually a process that can be driven bydata, not by hunches. Sooner or later, you're still going to have to make ahuman decision, but you will make a better decision if you are clear about whatthe question is and what we know about the outcomes that Annie Duke, who we'lltalk about again in a minute, wrote a great book called thinking in bets.

[00:11:03] And what she pointed out is thatdecisions are actually bets because nobody knows. What the future is going tobe. We are making an assertion, some predictions and trying to follow the bestpath we can. So you're going to need a little bit of a compass and a little bitof a map. So whether you can do is say, we are not going to lead in anything,we're just going to copy whatever somebody else does that if they go left,we'll go left.

[00:11:31] We're going to be a slightlycheaper, slightly, slower, slightly whatever version of them. And some peoplewill want that. The other thing you can do is say, wait a minute, blue oceanthinking new strategies, new opportunities to serve people. That's going torequire me to make decisions before I have all the information, but thatdoesn't mean you need to make a decision with no information.

[00:11:58] And what we know about decisiontrees is that if you are forced to put the information down in writing. Andmake guesses about what the odds are at each step, along the way you can make abetter decision. So here's an example, lottery tickets. If you think thatbuying a $5 lottery ticket will give you more than $5 worth of pleasure, thenyou should buy it VN.

[00:12:26] And the other hand, if you'reconsidering whether investing $5 in a lottery ticket makes any sense at all,all you got to do is in the math. And when you do the math, you will discoverthat yes, someone is going to win the lottery, but no, it's not going to beyou. And that $5 put into almost any other form of investment over time willpay off way ahead of buying a lottery ticket.

[00:12:53] M analysis can be used forcomplicated decisions, like which sort of regimen of medicine. We should offerto somebody who's struggling with a disease because we have plenty of data. 30%of people take medicine, they get better. 40% of the people are taking medicineB get better. On the other hand, on the other hand, when you take medicine Byour chances of side-effects go from this to that.

[00:13:15] And we go down the list witheach one of the pieces of data added up into a decision tree that help us thinkthrough what are the odds of this bet we are about to make. So in the case ofmy mistake with the worldwide web, it was pretty simple. I was seeking to makea business that was going to grow significantly.

[00:13:37] We knew how our current businesswas growing. We could see where it was going. What clues we had about mosaic isthat it was free AOL wasn't free prodigy wasn't free. Mosaic was free. So inthe short run, it would be a significant investment. To go onto the worldwideweb because no one was going to pay us to do it.

[00:14:02] We weren't going to have aclient. So I needed to make a decision. And in that moment, the decision was doI want to consider a huge platform and no client and make revenue in adifferent way. It's entirely possible. I would have chosen not to pursue it.But the interesting question is why didn't I bring rigor?

[00:14:22] To the decision-making andactually decide. Instead what I did was I defended my son cost.

[00:14:33] The next thing about decisionscomes from Annie Duke again, and it's about decisions versus outcomes. Outcomesare not related. Two decisions. Good decisions increase. The chances is you'regoing to have a good outcome, but they're not the same thing. So try thissimple experiment. Think about the three best decisions you've made in the lastfew years.

[00:14:56] Got them, got all three. Okay.Of the three decisions you picked, how many of them turned out well? And ifyou're like almost everybody I've ever spoken to about this, all three of them.Are things that turned out well, you decided to do something and you wereright. You decided to do something and it worked out that you can't help it.

[00:15:17] We're human. Our judging,whether it was a good decision based on whether it came out. Okay. That's notwhat makes something a good decision. That just means you were lucky now it'spossible. You also made a good decision and got lucky, but the outcome is basedon the odds. So let's think about playing cards for a minute.

[00:15:38] Let's say you're playing pokerand you need to make one last bet. You bet all your money, hoping that you willget one of four different cards. Any one of four cards will make it so that youwin the game. You don't know anything about how many cards are in the deck.You're just betting that if you've got one of these four, you're going to win.

[00:15:56] That's a bad decision. It's abad decision because even if you get lucky and the ACE of spades comes out andyou win a million dollars, Good for you, but you got lucky because the odds ofit being one of those four cards from a standard deck, that's been replenishedare one in 13, which means that 12 out of 13 times, you're going to loseeverything.

[00:16:20] And one out of 13 times you'regoing to win. If you pursue that path with your work, you're going to fail.Those are lousy odds. It doesn't work. Sure you got lucky. And one of theproblems we have as decision-makers is we associate the luck that comes fromprevious decisions with being a good decision-maker.

[00:16:40] They're not related that youmake the best decision you can, based on the data that's available to you. Andthen if it doesn't work out, you don't question the decision. You realize yousimply didn't get lucky. So now when you think back to three decisions you madein the past, were they good decisions or not now suddenly the math is verydifferent.

[00:17:10] So here's an example. Facebookand other companies offer to buy Snapchat for billions of dollars. They turnthem down so they can pursue their own future bedding on a vibrant, positivemedia outlook. And the stock market. The end result is that Snapchat never wasthe same again. Good decision or bad decision.

[00:17:32] The answer is we don't know. Wedon't know, cause we don't know enough about what their alternatives were, butmore important. We don't know what their objectives were. We know that if theyhad sold out, they would have had billions of dollars for sure. A hundredpercent chance of success on some metric.

[00:17:48] So if their goal was to make asmuch money as possible, the outcome shows us. That they didn't end up withthat, but maybe their goal was something else. Maybe their goal was autonomy.Maybe their goal was being able to lean into possibility. And the fact thatthey didn't get lucky doesn't have anything to do with whether it was a gooddecision or not, no.

[00:18:14] Going forward, then threequestions to ask yourself, number one, what decisions aren't you making? Howare you shielding yourself from opportunities to show up and make a newdecision based on new information, as opposed to keeping your head down andignoring what's going on around you. Second question.

[00:18:35] How many of your decisions aremade with rigor, where you're taking the time to sketch out a decision tree toimagine the odds of each one of the options as you move forward? And how manyof them are made on a hunch. And the third one is this we've all beenbrainwashed from a young age to associate good decisions with good outcomes.

[00:18:55] What would happen if you stoppeddoing that? How can you celebrate good decisions that you made that led to nongood outcomes? Because if you can do that, you're going to get better andmaking decisions. Your career is going to be about more than one event. It'sgoing to be a series of decisions. That compound one after another.

[00:19:18] And every once in a while,you're going to be tempted to make a decision based on getting lucky. Andthat's not fair to the people you work with to the people who have backed youand to your own work. The alternative is to say, I will align my decisions.With what it is I'm seeking to do. I will align my decisions with the future I'mtrying to create.

[00:19:38] And if I do that persistentlyand consistently with data and build resilience so that if I'm wrong, I'm notout of the game. Then you get to keep playing the game. And what we know aboutgames is that if you make good decisions and play them long enough, you willcome out ahead. I'm guessing it's time to go make some decisions.

[00:19:58] Thanks.