Two Proven Secrets To Faster Bank Decisions - Part II

Critical Thinking
CRITICAL THINKING

In Part I, we highlighted how having too much information about a decision often increases the confidence about the decision but usually doesn’t change the accuracy of the decision. In addition, gathering information takes time and effort, so the result is a more expensive and time-consuming decision that gives you a false sense of comfort. While most banks use the basic seven step process outlined below, in Part II, we highlight two additional rules for the decisioning box that can help increase decision effectiveness.  

 

Balancing Information With Action: The 40/70 Rule

 

In Part I, we suggested one of the steps in data gathering was to estimate what the minimum level of information that is needed before a decision is going to be made. Understanding what data is required before your due diligence increases the efficiency of the due diligence process and dictates the time required to gather that minimum set of information. This methodology begs the question – what is the minimum amount of information necessary to make a decision.

 

While the minimum required information varies depending on the decision and risk, there is a guideline that we learned from both the U.S. Marines and from former U.S. Secretary of State Colin Powell. Both the Marines and Secretary Powell teaches that when you face a difficult decision, you should have no less than 40% of the total desired information and no more than 70% of that information.

 

7 Steps To Effective Bank Decision Making

 

Within that range lies the “sweet spot” of data gathering. At 40% or less information, you are relying too much on your gut and not enough on the data. In this range, you sacrifice accuracy for speed.

 

On the other side of the equation, over gathering more than the 70% of the total desired information and not only will you likely slow the decision down and drive up costs, but requiring more information can often act as a rationalization for those that don’t want to make a decision either consciously or unconsciously. If you or the group know you need to decide once 70% of the total desired information is known, there will be more energy put towards making the decision.

 

As a side note, while we are talking about information and data, we are also talking about confidence, planning, or anything else. The important aspect of this decision-making model is to know the upper and lower bounds in which you will make a decision and then act accordingly. You don’t have to gather 100% of all the information, look at every vendor offering a certain solution or talk to every bank that has a similar problem, and you only need to work on 40% to 70% of the information available and then make a decision.

 

Second-Order Thinking

 

Once you have a decision made based on 40% to 70% of the information, the next secret to better decision making is to think through not just the impact of your immediate decision but the ramifications of making that decision. For example, one test that we often use is what will happen to our decision if we double in size? In other words, is the decision scalable? A technology, process, or decision that doesn’t scale well is likely not the right solution.

 

Another classic case is a common problem we now see among banks. Given margin compression, many banks are holding the level of their fixed-rate loans constant right now thinking they can help their margins. This could be a mistake as those banks that do are likely to get adversely selected. Quality loans will go to where they can get a market spread while higher-risk loans will accrue to these banks that seek higher margins. In the backend of a cycle, it is better to be credit-wise and margin foolish.

 

Second-order thinking allows you to future test your decision and go beyond the obvious ramifications of what is immediately in front of you. In this manner, often your decision may be too simple or convenient of a solution to stand the test of time. Testing the next iteration of your decision is a hallmark of successful organizations.

 

Putting This Into Action

 

Sometimes you have to take a step back and think about thinking. Training your leadership team on decision making can increase both the rate of decisions and the accuracy of those decisions. Try our favorite two techniques above and see if that improves performance. These tactics have worked for some of the best minds and highest performing organizations on our planet and we are confident that they can work for you.