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How Jeff Bezos Makes Decisions – Type 1 And Type 2

How Jeff Bezos Makes Decisions – Type 1 And Type 2

Type 1 Type 2 decisions is a methodology recommended by Jeff Bezos to make decisions based on whether they’re reversible or not.

Jeff Bezos, the founder of one of the biggest companies today, must use a sophisticated method of making decisions, right? Not always.

In a newsletter to the stakeholders, Bezos explained a simple methodology Amazon follows to make decisions. The technique is so straightforward that you can start applying it yourself in the next 5 minutes.

type 1 type 2 decisions Jeff Bezos

The two categories of decisions

Bezos explained that he classifies a decision under one of the two categories based on the risk.

Type 1 decisions: These are irreversible decisions that cannot be changed once executed. Therefore, they require careful thought.

Type 2 decisions: These are reversible decisions. Even after executing them, you can change them if you like. Therefore, you must act on such decisions quickly.

In his newsletter, Bezos compared these two categories of decisions using an example of walking through a door. Consider Type 1 decisions as one-way doors. If you enter them, you’re stuck there with no option to open the door and return. But most decisions are like two-way doors. You can stride past them, check what’s on the other side, and walk right back with nothing more than a little snow on your suit or dirt on your shoes.

Bezos wrote, “Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation.

If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions. But most decisions aren’t like that – they are changeable, reversible – they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.

As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions. The result of this is sluggish pace, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention.”

reversible irreversible decisions Jeff Bezos

Most common mistakes with decision making:

To some extent, human beings differentiate type 1 and type 2 decisions subconsciously. But, Jeff Bezos suggests making this thinking more deliberate. Though the concept seems straightforward, you’ll be surprised to see how often we apply incorrect logic to our decision-making process. We sprint when we should have walked and we make stop dead in our tracks when we should have galloped.

So, let’s go through the two most common mistakes of decision making:

Mistake 1: Treating reversible decisions as irreversible

When you have to make a simple decision, do you tend to think too hard? Many people do. You think and think until you gather a boatload of information from hours of research. But, most decisions don’t need that investment of effort and time.

A better alternative is to make a quick decision when the consequences are reversible. That way, you can evaluate what happens after and either reverse your decision or tweak it towards the right outcome.

Let’s take an example.

Amanda is an IT professional who is looking to make a career change to switch to data science. Since she comes from a different line of business, she isn’t sure if she can learn the required analytical and programming skills. So, she goes around and asks her coworkers, performs research on the internet, explores course syllabus from training institutes, and connects with people on Linked In. She has spent over a month and still hasn’t figured out a clear answer.

Amanda has treated this as a type 2 decision. Instead, she could have started with a beginner course or gone through free/low-priced training material on educational platforms. She would have experienced for herself, how easy or difficult data science is for her current skills. If she could grasp the concept, she could have dug deeper. If the subject was too difficult, she could consider other options. The hours she spent on research could have instead been utilized to get a real feel of data science.

We believe most decisions are type 1, but they aren’t. When you treat a type 2 decision with the ferocity of thought of type 1:

  • You tend to overthink
  • You undergo analysis paralysis
  • You spend countless hours on research, analysis, and decision making which could instead be used for taking the first steps of action
  • You take no action or fall victim to procrastination
  • You seek perfectionism and delay the outcome needlessly
  • Your decision-making process slows down
  • You develop a risk aversion mindset and try to steer clear of all possible pitfalls
  • You reduce your chance of innovation

Mistake 2: Treating irreversible decisions as reversible

Bigger decisions require careful thought and in-depth research. A reckless decision can lead to consequences that are impossible to reverse or too catastrophic to endure.

The second type of decision-making error is to approach an irreversible action with carelessness and take immediate action without thinking it through.

Let’s take an example.

Rodrick is a truck driver who recently retired. He has amassed money to spend his retirement with a reasonable lifestyle. But, if Rodrick lets his money sit in his savings account, it will lose value each year due to inflation. Therefore, he has to invest his money wisely.

If Rodrick just spends a few hours searching for the best investment opportunity, he might stumble upon the wrong advice. Even if it isn’t a Ponzi scheme, a risky investment isn’t suitable for an individual who is banking on the money to lead a peaceful retired life.

If Rodrick jumps to a decision, he can no longer recoup the damage because he has limited earning potential. Therefore, he must spend time analyzing the current amount he has in hand, the expenses expected, the risk involved, and make an informed decision.

Building on type 1 and type 2 decisions

Jeff Bezos’s methodology is based on the ability to reverse the decision. You can take this a step forward and take other factors into account.

Even when a decision is irreversible, if the negative consequences it leads to are manageable, you can still make a quick decision.

Time/money spent:

A few months ago I was looking for a landing page design for my website. I spent an entire day trying to narrow down between 3 choices to pick the right design which was compatible with my website requirement. The next day, I realized that the design costed $12. I should have gone ahead with the decision sooner because I could have tried and tested the actual design in the time I spent on research.

Even when you’re making a simple decision, you will inevitably spend time on the decision-making process. Some of these decisions will only need a split second, while some others can span over hours, days, or even weeks. For example:

  • Picking toothpaste from the supermarket rack(few seconds or minutes)
  • Choosing a hotel to stay in for your vacation(few minutes to hours)
  • Making up your mind to begin the first task for the day(few seconds to an entire day)
  • Buying a new pair of shoes(minutes or hours, can vary significantly based on gender)

Such decisions are irreversible, so if you go exactly as Bezos suggested, you’ll have to think carefully. But, you’ll have to take into account the time required to make the decision is worth it.

Consider time and money spent on a decision

For example, if you buy a different toothpaste, and it tastes different, you cannot return it at the store. By definition, the decision is irreversible, but does it warrant spending 1 hour at the supermarket choosing the best option for you? Not at all. In a day or two, you’d get used to the new toothpaste and might even start liking it.

Ponder over decisions only when the time you spend on them is worthwhile.

Related article: How to calculate the opportunity cost of your decisions

The severity of consequences:

If your decision can lead to a negative outcome and can no longer be reversed, does it require careful thought? Not necessarily. You’ll have to consider the severity of the consequences.

Recently, I was trying to buy a focus light so that my video calls have better clarity. I had various options to choose from. This time, I learned from my previous mistake and purchased a $15 light within 15 minutes. The light arrived, but it did not fit my requirement. That item on Amazon did not have the return option, and the only option I had was to ask for a replacement, but that would not serve my purpose either.

Was my decision reversible? No. Did I face consequences? Yes, I lost 15$. But that was more sensible than spending hours together pondering over the best light to pick.

consequences of decisions approach

When you make decisions, things will go wrong. You cannot make the perfect decision every single time even if you consider every nitty-gritty detail. Even if you can do that, consider the magnitude of consequences before doing so.

If you can deal with the consequences and brush them off, make decisions faster.

The middle ground:

Let’s look at another example that falls between minor and major consequences – ordering food online. A few years back, to order food you had to call a nearby restaurant and mentioning the dishes you wanted. You had about 5 options in your vicinity to choose from.

Today, with online apps, you have a hundred choices or even more. “Should I order a pizza or pasta? Oh wait, I haven’t had a burger in a while.” My brain goes loggerheads against my stomach every time I have to order food.

But, you can simplify the decision by applying the logic of type 1 and type 2 decisions. Ask yourself how important is it to order the best cuisine for the night or to pick the restaurant with the right rating. If you order the wrong dish or pick the wrong place, the food that arrives won’t be as tasty as you desired.

But, how big of a problem is it? Does that mean you’ll dispose the food and stay hungry? Will you place another order? The answer to such questions is subjective. I would choose to eat average-tasting food one night instead of spending 45 minutes deciding what to order. If the food tastes terrible, I’ll remember not to order from the same restaurant again. For me, ordering food is a type 2 decision. I make an exception when I have guests at home because I want to ensure I’m not feeding them inferior food.

You might have a different opinion. If the taste of dinner is important for you feel free to take your time thinking through. It still doesn’t make the decision a typical type 1 that Bezos suggests spending careful thought on. But because it isn’t reversible, many people find that discarding food is neither appropriate nor affordable.

Related article: How to make decisions using the OODA Loop

Overall characteristics of Type 1 and Type 2 Decisions:

You cannot always classify a decision as Type 1 or Type 2. But, the overall characteristics of these decisions are as follows.

Type 1 decision:

  • Needs concrete information
  • Think and act
  • Aim to get it right
  • Consider different angles and prepare yourself to make the right choice
  • Put in the effort and thought into the decision

Type 2 decision:

  • Can be executed with incomplete information
  • Act fast, test the outcome and improvise
  • Aim to get it right but consider other factors such as time, effort and money spent
  • Be prepared for the decision to go wrong
  • Do not aim for perfection

Advantages of segregating type 1 type 2 decisions:

When you encourage yourself to think in terms of the reversibility of decisions, your mind will start working differently. Instead of applying the same logic to all decisions, big and small, you’ll consider the speed of execution and the cost of your actions. Such a change in mindset comes with advantages such as:

1. You act faster and avoid analysis paralysis

Have you observed how startups grow faster than large organizations? That’s because a startup requires fewer approvals for execution. Compare that with an MNC which requires a sign-off from 3 different people across 3 continents to get a laptop replacement. For the same reason, democracies have difficulties executing decisions.

When you think about every situation too hard, you’re vulnerable to analysis paralysis which leads to procrastination and lack of any action.

2. You avoid the stress of small decisions

We all worry about things going wrong. But, it’s the fear of making the incorrect choice that bothers us more than the outcome of the decision itself. By looking at a decision as type 1 or type two, you avoid overthinking your little choices and mitigate the stress that comes along with it.

3. You can make decisions with lesser information

If you’re keen to make the right decision every time, you’ll hesitate to take action when the information is unclear. For simple actions, failing to make any decision can delay the outcome. You’re better off making the decision with the information at hand and check what the outcome is. If things didn’t go as planned, you can course-correct accordingly.

4. Saves mental energy

Just like physical activity consumes energy, thinking and making decisions drains your mental reserves. Each day, your brain has the ability to only make a limited number of decisions. When you overthink your little choices, you deplete your mental energy faster leaving you exhausted for the important decisions.

Related article: How to avoid decision fatigue

5. Offers learning opportunities

Even if you’re a meticulous planner, you’ll know the reality only after you dive right in. Until then, all you have is an assumption, albeit a thoughtful one. But, when you act faster accepting the fact that your decision can go wrong, you experience the outcome of your choices, and expose yourself to reality, thereby learning insightful lessons. Over time, such an approach builds your knowledge and all-round expertise.

Pointers for making decisions the right way:

Here are two pointers to keep in mind while making decisions with the type 1 and type 2 approach.

1. Not an excuse for making reckless decisions:

Type 2 decisions are not a justification for making careless choices. If a decision requires thorough research, don’t hurry the process thinking, “Jeff Bezos advises us to act faster.” No, he doesn’t. Bezos recommends acting quickly only when a faster decision has a bigger benefit than rigorous thought.

2. Make decisions with 70% information:

Bezos said, “Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow.” His rationale is that acquiring 90% of the information is time-consuming. A person who is good at course correcting will incur minimal damage from wrong decisions, whereas being slow will be expensive for sure.

Related article: Time vs Money: Which One Should You Prioritize?

Conclusion

As human beings, we hate to get our decisions wrong because we fear the outcome. Besides, making an incorrect choice hurts our ego. But, more often than not, our little decisions have negligible consequences. Yet, we think and think, until we’re entirely sure about making the right decision. Not only is the process tiring, but also a waste of energy.

Instead, cultivate a habit of making swift decisions for reversible outcomes. Not only will you move faster, but you will save your mental energy for the big calls.

Have you overthought a type 2 decision? Leave a comment.

References:

Haden, J. (2018, December 3). Amazon founder Jeff Bezos: This is how successful people make such smart decisions. Inc.com. https://www.inc.com/jeff-haden/amazon-founder-jeff-bezos-this-is-how-successful-people-make-such-smart-decisions.html.

Reversible and irreversible decisions. Farnam Street. (2021, May 8). https://fs.blog/2018/04/reversible-irreversible-decisions/.



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