The power of three: the art of making hard decisions

Over the years, I have wondered what the single most frequent task is in my role as a VC and how I can do it well. The answer is making decisions – making hard decisions, to be precise.

And why is getting the hard decisions right so important? Very simply, so that I can sleep well at night.

Photo credit: Tingey Injury Law Firm / Unsplash

Framework

We call them hard decisions because the outcome is hard to predict and the stage before such a decision is made is dynamic and unclear.

I have developed a simple framework over the years, and it has served me well.

To me, making decisions is like operating a machine. There is an input, an engine, and an output.

It starts with arranging information as a good input. This process depends on cognitive skills, and the three most important cognitive skills are the speed of processing information, category formation, and pattern recognition.

Fortunately, the speed of processing information is not correlated to experience or age. Any young decision-maker can develop this cognitive skill.

On the other hand, category formation and pattern recognition require experience, and as you mature, you develop a broader view.

The ability to define categories well requires exposure to what’s possible in life. To help hone this skill, we can explore new things, such as by traveling to new places, learning new skills, or meeting new people.

Pattern recognition is harder to master. It requires the observation of consistency that is coated by inconsistency. It requires one to neutralize information from personal and group biases. Age and experience matter for this.

Principles

Once the information is organized, you put it into the engine. Then comes the principles of processing information.

The three principles that I use a lot are the Pareto principle, the principle of diminishing returns, and the power of three.

The Pareto principle says that 80% of consequences come from just 20% of the causes. In our era of information overload, just 20% of the information we’re faced with, the tasks we do, or the decisions we make give us 80% of the important outcomes. This is the engine that helps filter many decisions into a few important ones.