Personal Finance

How to Follow Your Heart AND Manage by the Numbers

My book on starting or running a small business is entitled Passion and Reality , and the title becomes more and more appropriate as I mentor small businesses. On one hand, you need passion. You need to trust your gut. On the other hand, you need to rely on measurement and analytics to make sound decisions. Understanding and balancing both strategies can be the difference between success and failure.

Understand Your Needs and Process of Decision-Making

Both analytics and intuition have value. For example, I have a friend whose daughter moved to California with all the hopes and dreams that we admire in young people; however, she ignored simple analytical things - like that her New York professional license was not valid in California or that real estate agents don't count off-the-books income in qualifying for an apartment.

On the flip side, larger businesses often ignore instincts and focus on data until it is too late. Just look at large retailers ignoring the internet, television networks ignoring cable, and even taxi companies ignoring Uber. Intuition is generally fast, experienced-based, and actually considers many factors that analysis often misses.

Beware of and Minimize Bias

The greatest detractor from effective decision-making, which can be intentional, random, hidden, or even unknown, is bias. Factors of bias:

Probably the greatest source of bias is our own set beliefs. It's too easy to simply ignore information that differ from our own experiences. Our perspective can create bias. For example, right-brain and left-brain people simply look at different things and see them differently. Incomplete or wrong information. The most glaring issue is that showing a relationship does not necessarily mean cause and effect like all the erroneous things people use to try and predict the stock market.

Include Risk and Probability

While we can praise intuition or analytics, risk and probability are also key factors in the process. Consider the following:

Buying a lottery ticket has minimal risk because of the low cost but high potential value. In contrast, ignoring medical problems can have very high risk and very unfortunate consequences. Decisions and risk are also greatly affected by probability and information. There is a huge difference in predicting results where there is significant and consistent historical data. However, predicting results for new programs or with little or inconsistent data becomes much more difficult. We generally are overly concerned with the consequences of mistakes than the potential of risk. This approach is well stated by Sheryl Sandberg in her comment: "What would you do if you weren't afraid?" Another reason for more risk is our aversion to losses. One of my management principles has always been, "If you aren't making mistakes you aren't trying hard enough."

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Be More Open

Organizations need to be open to measurement and feedback. Observing, understanding, and sharing financials, operations reports, and sales reports are the first step. A management style such as "walking around" and asking simply, "How am I doing? Is there anything you need? Thank you," can be priceless.

Our approach is to consider both approaches and consider the appropriateness and effectiveness in each situation. Some simple tips are:

The greater the certainty, the more analytics can improve decisions. The greater the uncertainty, the more intuition is necessary to at least develop alternatives. Intuition is essential in developing ideas and hypotheses. In contrast, analytics can be especially useful in analyzing results and developing new modifications. In using analytics, be sure to consider the validity of the data, sample size, bias, uncertainty, and risk in making decisions that can undermine the use of analytics. Remember the analytics are only as good as the least reliable variable. You need to understand the dynamics of how volume, price, and profit interact with marketing models. You can't make it up with volume if you lose money on every transaction. In using intuition, consider how change, demographics, and the environment can affect tried and true beliefs. Develop simple models like our profitability model that allow you to analyze the interaction of various factors with different intuitive alternatives.

In summary, understand the use of analytics and intuition in your decision processes. The assumptions, results, effort, and process can be greatly aided. In general, more analytics is generally useful for small businesses; however, one must be sure the foundation, reliability, data, and processes of the analytics have a firm base.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.