Business is a Hypothesis

Once, I sat in a board meeting listening to my friend and mentor, Keith Cunningham. He talked about getting better optics (one of his favorite topics) and how that helps to make better decisions. 

I started thinking about the times when I have made some bone-headed decisions. Ones that I look back on and wonder, “What the hell was I thinking?”

I realized part of my problem is that I get tied to one idea and become emotional. I start to defend it as if it is right, and that’s when we could be in big trouble. Business is not religion. In religion, there is right and wrong. In business, there is simply right and left. Every decision you make COULD be an amazing, awesome one that takes you and your company to new heights, OR that same decision could be one that takes you down the wrong road and loses you lots of money.  

We’ve all been there.  The only way to know is the test of time.  When you look back a year from now, you will know if it was right.  

That can be a frustrating proposition. So, how do you make decisions? What is the right thing to do in a particular situation?

This takes me back to my scientific roots.  

At heart, I am a scientist and a firm believer in the scientific method, and I think it applies well to business. In science, we form a hypothesis. We don’t (or shouldn’t) fall in love with this hypothesis. We are not trying to prove the hypothesis to be true, but rather to see as an outside observer whether it is, or isn’t, true.  Being right is not the goal. Proving or disproving the hypothesis is the goal. 

Usually, what happens is we create a hypothesis, we set up a set of experiments with usual standards and methods, and then we test it.  At the end of the testing, we use statistics to prove or disprove the hypothesis or at least explain the probability of it being true. We are not tied to the outcome; we never were. We were the observer. Our goal actions are oriented toward the hypothesis, not the outcome of it.  Usually, the outcome of a good science experiment is simply to create another (or several more) hypotheses. Then, we take these hypotheses and the process continues.

For some reason in business, people tend to get tied up in their hypothesis as if it were real.  They defend their idea as if it were the truth. 

For example: Should you lease an existing building, or should you build a new building?  

I know what just happened; you immediately jumped to one side of the argument or the other.  You can defend it, and you are 100% convinced you are right. That is the problem. If you cannot intellectually and sincerely argue both sides of the argument, you don’t fully understand the issue. Being able to have optics to argue both sides shows intelligence. Being able to argue only one side shows ignorance.  

CVS pharmacy, a very successful pharmacy company, does not own any of its real estate. That must be the model that works. The argument goes CVS doesn’t own real estate—we are not in the real estate business—saving money, not building real estate, would allow us to grow our core business faster— therefore owning our own real estate is a bad idea.  

The other side says, “Well, wait a second.”   

McDonald’s owns all its real estate, and they are very successful, so that must be the model.   McDonald’s owns its real estate—real estate is another asset, and assets produce equity and income long term. We can pay for real estate with our own business, so why would we give that away? Therefore, owning real estate is the best idea.  

We have to be careful when we string a group of facts together in order to form a conclusion. For example: God is love and love is blind. Like love, Ray Charles is blind. Therefore Ray Charles is God.

That’s the problem in a nutshell. You must be savvy enough to see both sides. Not only to see them but to be able to argue for them with passion.  

The smartest Venture Capitalists and Capital Partner groups do this very thing. They will assign one half of the room to argue why a purchase they are making is the single best business decision they have ever made. The other side of the room is assigned to argue the opposite.  They argue why this is the single stupidest idea they have ever had.  They debate for hours, sometimes for days. That is how you think about an idea and get all the facts.  By the end of their arguing, hopefully, they have come up with something much better than what they had when they started.

I think this is ingenious.  

The bigger the decision, the more time and effort should go into that process of deciding. I tend to make decisions very quickly, as do most entrepreneurs and successful people. That is usually a great trait, but it can also be a weakness.  There are times when a more methodical approach, like the one mentioned above, is needed. 

Now, put it in practice. 

The next time you and your company need to make a decision, here is what NOT to do:

1. Don’t make the decision without input from key players on your team.
2. Don’t make the decision without asking a mentor, or another who has been there, doing what you are doing.
3. Don’t make the decision without getting someone to legitimately argue both sides.

Got it?

Living Every Minute.

Dr. Tim