03/05/2012 03:36 pm ET Updated May 05, 2012

Good Decisions Require Proper Framing

I can say a lot of things about green unicorns that might sound perfectly reasonable. Like green unicorns don't fare well in captivity because they are generally skittish and don't like to be around humans (this is why they are rarely spotted in the wild and you probably have never seen one). Green unicorns are green because their habitat is woodlands so the green color of their coat acts as camouflage. You can't ride a green unicorn because they are impossible to tame. To someone who is naïve about the existence unicorns, all of these statements might sound really reasonable. But the problem is that green unicorns don't exist.

Good decision-making involves a lot of pieces: proper frame (what is the problem I am trying to solve?), good goal setting, properly evaluating alternatives, etc. But you can do all of these things perfectly, you can frame a problem perfectly, evaluate alternatives just right, set your goals properly, and still make a bad decision if you aren't thinking rationally, if your assumptions are just wrong.

Think about a paranoid schizophrenic. If you accept the notion that someone is out to get them, then their behavior given that assumption looks quite rational. They are suspicious of strangers. They suspect they are being followed and to solve for that will often refuse to leave their house. They won't open the door for strangers. They may behave as if even someone they know is actually in disguise or has been recruited to try to kill them. If you move toward them quickly they might attack you in self-defense. If someone were actually trying to kill them, all of these decisions look completely rational, just watch any spy thriller for details on how you should act if someone is trying to kill you. But if the premise is wrong, then the whole decision chain falls apart and the behavior as a whole becomes completely bizarre.

This piece of good decision-making, the piece where you have to determine if you are thinking rationally, is the hardest to get mastery of, it is the hardest piece to figure out because we so often have no idea if our assumptions are right or not.

If you look at the financial sector, you can see the problem at work. The banking industry made an assumption somewhere along the way that housing prices would have a constant upward trend. Once that assumption was in place, the behavior of the mortgage industry and the investment bankers looks completely rational. If prices will continue to go up, then lending money at 0 percent down is a rational choice because while a home buyer might not start off with any equity in their property, they will build equity as time goes on. An ARM becomes a rational choice because even though interest rates might go up on the loan within three to seven years, that is okay because the buyer's house will always be worth more than when they bought it so they can always sell or refinance to solve for the interest rate problem.

But the assumption wasn't true. And when housing prices tanked the house of cards came tumbling down as the whole basis of the decision chain was ripped out from under us.
We all operate on assumptions. We assume the sun will come up every day. We assume we aren't getting fired tomorrow. We assume that the FDA is protecting us. All of our decisions are based on assumptions. So challenge your assumptions because so often they are just wrong.