In a 2015 letter to shareholders, Amazon CEO Jeff Bezos proposed two types of decisions entrepreneurs and executives regularly face.
A Type 1 decision represents a door you walk through and can’t go back, such as quitting a well-paying job to focus on your side-hustle full time.
In Amazon's case, its web services business was a risky gamble that's worth more than $190 billion today.
“These decisions must be made methodically, carefully, slowly, with great deliberation and consultation,” Bezos wrote.
A Type 2 decision represents a reversible choice by an individual or smaller groups, for example, testing a new product with a group of beta customers or the layout of a section on the Amazon store.
Jeff Bezos via Seattle City Council from Seattle [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0)]
How To Make Optimal Decisions
Ideally, spend up to 10% of your work week on Type 1 decisions. These are draining and time-consuming, but they demand your attention.
Don’t make Type 1 decisions while feeling angry, hungry, lonely or because you’re tired of the process. For example, it’s probably not a good idea to quit your job because you feel despondent on a Monday morning.
Make Type 2 decisions relatively quickly by batching them, delegating to a team member or outsourcing to a contractor.
Again, rather than letting emotions overwhelm you, learn what you can about the problem.
You can also triangulate a big decision by consulting other experts with contrasting views (what Ray Dalio does).
Plan For Unexpected Consequences
Many of your decisions will have unexpected consequences.
Perhaps you create a product customers love only to find you must spend hours fulfilling orders and providing technical support.
These unexpected consequences often represent Type 2 decisions that you manage through delegating, outsourcing or reviewing business processes.
“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,” Bezos wrote.
For example, a new entrepreneur considering an email service provider will weigh carefully the costs of this software.
This choice affects their cash flow noticeably, and theentrepreneur will also have to decide on a solution that's easy for them to use. So he or she might spend several hours reading reviews and testing what’s on the market.
A more established entrepreneur might be happy for a team member to recommend several solutions before selecting one. Then he or she will evaluate the total cost and consider how long training others to use this new software takes.
Take Responsible Risks With Your Choices
The biggest returns sometimes come from decisions that go against accepted wisdom.
Why would readers want to consume books on a digital device when they can buy a paperback?
Why would an e-commerce store get into the cloud-hosting and services business?
Will people really trust drones to deliver their everyday purchases?
Bezos wrote, “Given a 10% chance of a 100-times payoff, you should take that bet every time.”
Plan For Failures
Amazon has taken many bets over the years. Some, like the Kindle and its cloud services business, paid off.
Others, like the Amazon Webstore (a Shopify competitor) and Amazon Fire Phone were expensive flops, with the latter costing the company more than $170 million.
Bezos believes these types of failures are part of the job.
You’re still going to be wrong nine times out of ten. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for the many previous experiments.”
After all, entrepreneurs or executives who embrace their choices learn far more than the people who run away.