How much information do you need to make smart decisions?

You’ve probably heard a variation of “to one with a hammer, every problem looks like a nail.” And that’s true when it comes to decisionmaking as well. It’s a matter of perspective. Economists have complex models that describe how people make financial decisions. Sociologists have frameworks that explain social behavior. Ditto psychologists. And neurologists. And so on. Every one of these decisionmaking systems sees the world as a specific type of nail. 

And none of these are straightforward enough to help you make better decisions in your everyday work and home life. Making good decisions really comes down to two things: asking the right questions and understanding how much information you need before deciding. But in an era of limitless free information, how do you know when you have enough information? That’s tricky business.

A general, a CEO, and an economist walk into a bar…

Making good decisions is such an important and difficult topic that there are practically as many opinions as people expressing them.

Colin Powell, the respected former Chairman of the Joint Chiefs of Staff and U.S. Secretary of State, shared one of his decisionmaking rules. He said that when you have an important decision to make, remember “40 to 70.” Never make a decision with less than 40% of the information you think you need. And never delay making a decision once you have at least 70% of the information you think you need. The time it takes to gather enough information to be 100% sure of making a good decision usually delays the decision beyond when it needs to be made. A problem known as analysis paralysis.

In contrast to Powell’s well-ordered decisionmaking style was that of Steve Jobs, the former CEO of Apple. Was Jobs a good decision maker? His style emphasized intuition and gut instincts over information. He made quick decisions after discussing problems with his employees in order to identify and elevate the best ideas, regardless of their origin. He also seems to have relied on relatively little information, instead making a stream of micro-decisions that added up to great things. 

Then there’s Daniel Kahneman, the Nobel Prize-winning economist, whose lifelong research found that people generally make one of two types of decisions. As he outlined in his book Thinking Fast and Slow, people use two different approaches to decisionmaking. Fast decision making is based on rules of thumb (heuristics), past experiences, and untested assumptions. He calls these types of decisions System 1 thinking. Its advantage is that it is a fast way to make a decision. Its disadvantage is that it is not always the best way to make a good decision. System 1 thinking is most useful for decisions that are inconsequential or are easily reversed.

In contrast, System 2 thinking is logical, evidence-based, and emphasizes rational analysis. You examine and test all your assumptions, weigh the various alternatives, assign probabilities to outcomes, define the net benefit. System 2 gets you much closer to a quality decision but at the expense of taking a lot of time and effort. 

System 1 and System 2 both have their costs and their benefits. The worst outcomes, however, occur when you misapply them. You use detailed and exhaustive analysis for an inconsequential decision (Should I have one more French Fry?) or you use a simple rule of thumb for a consequential decision (They say interest rates may be going up. Better refinance now.). 

So what do these diverse perspectives about decisionmaking tell us? After all, they really seem to raise more questions than answers. How much do you know about the particular issue? Is this a casual decision or an irreversible decision? Do you have a lot of time or not much time? How much do you know and how much do you still need to learn? What does your gut tell you?

What’s important is what’s in common between them: information. And in today’s digital age, information is a tricky subject.

Information and ambiguity

The Internet gave us practically limitless access to facts and opinions. It did not, however, give us a filter to manage these facts and opinions. Without that filter, trying to decide anything using infinite data is an invitation to paralysis by analysis. 

Once upon a time, when decisionmaking took place in an environment of scarcity of information, people had to be clever in finding the choice bits of data that were available. Today, we have to be clever about asking the right questions, in order to avoid the deluge. 

Limited access to information made it expensive to spend the time necessary to get the information you might have wanted for the decision you needed to make. Before the Internet, when you had to go to a library or a government agency to photocopy or transcribe information, it took hours and it cost money. When you have access to that same information instantaneously, at any time, it only takes as much time as is required to cut and paste. Little time and virtually no cost. 

In standard economics, what happens when the cost of something goes down? Demand rises. Today, with the cost of information and data plummeting, the demand for it rises. But do we need that information? When is there too much information and are there circumstances when we should cut back? Certainly not every choice requires a deep analysis. Just because information is cheap doesn’t mean that we make everyday decisions into research projects. 

But the opposite condition does also still prevail, mostly in fast changing environments with uncertain information. Some significant, long-lasting decisions need to be made within tight time frames. You might want to wait until you have better information but circumstances require a prompt decision. How do you resolve this tension?

Asking the right questions

Avoid overly broad and general questions. The right questions are those that are more likely to lead you to relevant, useful answers. Although they’re more difficult to answer, questions with more specifics will generate more meaningful results. The more specificity you include in your question, the more opportunity you have to find the right answer and avoid getting stuck in information overload. 

The critical factor is time. Context and circumstances change at their own rate and your decisionmaking has to keep up. Information gathering and analysis take time and if you wait too long, the moment has passed. In Powell’s experience, 70% is enough to make the decision reasonably safe without waiting too long. 

At the end of the day, too much information slows you down and can cause you to delay making important decisions. The antidote is to accept ambiguity and risk—you can’t know everything. But you can ask the right questions, explore relevant answers, then pull the trigger on your decision with confidence.