Episode 11: Prof. Mike Vorster on: Safe Bets and Bold Moves: Mastering Decision-Making in Construction

Summary

On this episode, Clue CEO, Oded Ran, speaks with Professor Mike Vorster, a world-renowned expert in construction equipment management and the author of Construction Equipment Economics, discussing the fine balance between playing it safe and taking bold risks in decision-making.

They explore the psychological factors influencing choices, the impact of behavioral economics, and practical advice on recognizing and mitigating risks.

This episode offers valuable insights for construction company owners, fleet managers, and equipment managers looking to master their decision-making processes.

Links

Mentioned on this episode:

Mike Vorster - Construction Equipment Management (CEMP)

Thinking, Fast and Slow by Daniel Kahneman

Predictably Irrational by Dan Ariely

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Read a Transcript of the Episode

[00:00:00] Oded Ran (Clue): Hi everyone. So five years ago, I think it was Mike and I recorded our first, podcast together and, we kept in touch and a few weeks ago we said, how about we record a follow up and, Mike, you had a great idea. To bring up a subject that I will let you describe it. Decisions, being right and being wrong.

[00:00:29] Mike Vorster: Difference between being right and being wrong.

Oded, yes. If I can say how nice it is to always have creative and imaginative and far reaching and deep thinking conversations with you from time to time. The topic we touched on and the topic I'd like to talk about this afternoon is this business of, "Are we or are we not rational thinkers?"

And, do we, or do we not always try to optimize situations or are there other things, other than just plain rational thinking- and the wish to optimize a situation- that influences our decision making? And, if so, what are those things that influence our decision making?

[00:01:18] Oded Ran (Clue): Yeah, so you said to me this a few weeks ago- that's what instigated this recording- you said, Oded, people don't care about being right, as much as they care about not being wrong! Right? And, that, that really struck a point. So what, made you share that?

[00:01:39] Mike Vorster: A little while ago I was involved in a teaching training exercise where we were talking about a thing called "industrial marketing", whatever, that might be. And in the process, we drew a distinction between, the purchase decision, when you individually are the end user, and the purchase decision when the person who making the decision is not necessarily the end user. And also particularly when the person who's making the decision, perhaps has their job at risk or their career or their future at risk. And then the whole element of being conservative, comes into play very strongly. And under those conditions, what the decision maker frequently says is, I sure as hang might not be right, but I'm not going to be wrong.

Because if I'm wrong, then I'm going to put myself, my career, my future, perhaps, at, at risk. And so I'm going to make a very conservative decision, and a decision that protects me. As opposed to going with laser focus to what some folk might define as the "right" decision. So the phrase, we, we threw around that day during that conversation was, "I might not be right, but I sure as hang I'm not going to be wrong", in the conservative nature of that decision.

[00:03:18] Oded Ran (Clue): Yeah, so there's really been tons of research and I think in the last few years we're hearing a lot, in the last 20 years maybe, about rational decision making. And, one of the, key things that really was found is human beings and animals in general, we're much more driven by, our desire to avoid risk, right? Than by desire to gain. And, and I want to share something that I've seen that was pretty cool and we'll do a quick test and anyone's watching it later, please do the same test on you.

Mike, I'm going to give you now two options and I want to see which one you go for. Is that okay?

[00:03:56] Mike Vorster: Sure.

[00:03:57] Oded Ran (Clue): Okay. Option one, I'm either going to give you a $100k right now, a $100,000 , or, we'll flip a coin and,. either you get nothing or you'll get $200,000. Which one of these bets are you picking? The $100k in the hand or throwing a coin and zero or $200k?

[00:04:20] Mike Vorster: I think, I would take the $100k in the hand and I'm, pretty sure most folk would, would do that because, the temptation is just, just too strong.

[00:04:31] Oded Ran (Clue): And the feeling that if, imagine that you flip the coin and it falls on the, on the wrong side, you got nothing, just that, can you, feel that pressure in your stomach right now? I could have...

[00:04:46] Mike Vorster: Yeah. The agony of regret certainly exceeds the ecstasy of the game.

[00:04:54] Oded Ran (Clue): Beautiful. That's the title. The agony of regret exceeds the ecstasy of the game. So now let's, I said that's a two part. Now, a different question. Something happened and you have to pay up. I give you two options. You have to give me $100k. You have to give me $100,000. Option number two, we'll flip a coin and if it lands on one side, you don't need to give me anything.

Okay, if it lands on the other side, you have to give me $200k. Okay, so what would you choose? Giving me $100k for sure or flipping a coin?

[00:05:31] Mike Vorster: And the decision making mechanism is going to be a fair and balanced decision making as in flipping the coin.

[00:05:41] Oded Ran (Clue): That's right.

[00:05:42] Mike Vorster: Again, I think I would flip the coin, or not again, I would flip the coin in this case because I'll be seeking to avoid the agony of the loss.

[00:05:55] Oded Ran (Clue): Absolutely. So that's really interesting and that, that thing I'm sharing, I think that's one of the experiments that got, two folks, from Israel, Kahneman and Tversky to ultimately win the, the Nobel prize, right, in Economics, because they're showing that people actually are making, we can think they're rational, but actually irrational, right?

In the first case, you took the $100k. You wouldn't flip the coin, right? You took the $100k, it's in your pocket. But when it came to the other side of losing, you flipping the coin, you're willing to take the chance of losing even $200k just because they have the opportunity of not losing anything. And, that's how we behave, right?

As human beings. We may, rationalize it, but it's not rational, right?

[00:06:39] Mike Vorster: We're far from rational in our decision making and, you mentioned the, Kahneman and, the group in Israel who, started this whole subject of behavioral economics and, if there are any of the folk who are listening to this, I strongly recommend that you read and that you look at a lot of things that they've done and I was just, I started my, thinking in this direction by, reading Dan Ariely's book, "Predictably Irrational", and, perhaps if we put the money aside, the questions of money aside, there's a, one of the early examples that Dan Ariely gives in his book is that he was a fighter pilot and had an accident and was very badly burned.

And the nurse used to take a long time removing his dressings. And so he had this extended period of relatively, not, this extended period of substantial pain while the dressings were being changed and he said, I would actually have preferred a shorter period of excruciating pain. And so sometimes, and in this case, he was saying that the nurse was wanting to be kind, by reducing the depth of his pain, again, the agony, but she significantly exceeded, extended the period that he was experiencing that, that level of pain.

And yeah, we're not rational and, frequently, if not invariably, it's a very personal decision as to how we do these things.

[00:08:21] Oded Ran (Clue): Mike, you've trained, I think, you said to me once, 24 out of the top 25 heavy construction companies in the country. So folks listening, they're short for time and they might be super interested in this, but then, how do we apply all of this to the world of heavy construction, to equipment management?

Because obviously, rationality is a very all- encompassing topic. Anyone's right now watching this, let's talk about a few examples where that's relevant for their world.

[00:08:54] Mike Vorster: The Holy Grail, the end result, the thing you always look for in your marketing and in your product development and your brand development is to put yourself in a position where making a decision cannot be wrong. And I think that if we think about the difference between, for instance, a Dell computer in the business world and an Apple computer in the business world. Now, I doubt that any relatively large company

IT manager would make the decision to go with the Apple Mac, regardless of how good or bad it is. We may feel it is because Dell has achieved a position in the business world and the business IT world where you might not be right, but you sure as hang, I'm not going to be wrong.

I think we can also brand around a couple of other, or throw around a couple of other brand names. It's, it's strange. The Ford F 150 pickup truck in the construction industry, which is, happens to be a hobby horse of mine. Again, there may or there may not be pickup trucks that can perform better, but their position in the construction industry, is such that I may not be right, but I sure as hang I'm not going to be wrong if I make that decision. And, there are, many brands that do that, and in the software business, which is the world in which we were talking about this, I think there are coming some, some software products which are achieving such levels of acceptance by the industry that, that they're, "I might not be right, but I sure as hang, I'm not going to be wrong" if I, if I make this decision and that's, what all brand managers strive for, right?

[00:11:00] Oded Ran (Clue): Absolutely. And what does that mean, therefore? Because that is the way we make decisions. But from the other hand, what should a fleet manager do? For example, they're debating now between, I don't know, you picked up Caterpillar as an example and they're looking at the specs and prices and other options.

There's something else that they feel they could be right actually going with another option. How, what's the, what are the heuristics? What are the things they need to ask themselves? Or is it actually a case that 80 percent of people will just prefer not to be wrong. And 20 percent of people are the ones pushing us forward and testing and trying things.

And they're the one are who are the trendsetters. Is that how it works?

[00:11:43] Mike Vorster: It's that 20% who risk a little, who enjoy, great successes from time to time. Like I say to, like I say to a lot of folk, I say, it's really lousy to be average. All right.

[00:12:00] Oded Ran (Clue): It's really lousy. What is that? It's really lousy to be

[00:12:03] Mike Vorster: lousy to be average. I think it's that 20%, the early adopters, the speculators. The folk who take some risks and who take some chances, who really enable us to, to move things forward.

That's not to say that the established brands don't also move things forward. But I think that, great rewards require great risks. And I think that we, must be thankful for, the folk who are willing to, to put their careers and their jobs on the line, for, being a little adventurous, because without that adventure and without that sort of courage to, to speculate a little. the courage to, to adventure a little. I think the world would be a very dull and dreary place. Yeah.

[00:12:58] Oded Ran (Clue): It also explains, construction just from a margin perspective, 5 to 10% is inherently risky. And that probably does explain why lots of the decisions about what to choose, are more, let's call them risk averse, right? You're trying to reduce risk that you can control and you cannot control the weather.

You cannot control necessarily your GC or ownership and all the other surprises. So at least you're trying to minimize the risk by going for something familiar. Even if it's 20 years old, even if it's, your example of a Dell, right?

[00:13:32] Mike Vorster: Yeah. perhaps you've touched on a really, really important point there if we're sticking to construction in our conversation. And that is that, There are so many risks in construction that we can't control, that we just have to accept as, as the price of doing business. and of course, I wish I could get the margins you've just quoted.

of course, margins are very, tight in our business. And so with a high risk business where margins are very tight, in those risks where we can be conservative, we probably will be conservative because, we can't, we can't take chances. We can't take chances with everything or with many things.

And so we'd better manage the risks we can. And I think that will drive the construction industry to being a relatively late adopter and a relatively conservative business, because there are so many risks, ground conditions, weather, productivity, and all those things that we just don't we just can't control.

Okay.

[00:14:52] Oded Ran (Clue): We're speaking about these risks on a organization level, but, as we're talking, it reminds me and makes me think about risks on a personal level. More often than not, we would speak with, whether it's an IT person or equipment director and they're using something. And now maybe they've seen something else.

Maybe they've looked at Clue or maybe it's a different system or an option that they're, considering, "Oh, maybe this would have been a better or more right decision", but I already made a different decision and we usually refer to this as sunk cost. And I think it's, like MBA 101, that sunk cost is not something you should necessarily consider because you already incurred them.

But when it comes to individual and emotions and risk taking, some costs are actually a big deal and it feels somewhat connected to what we're discussing here.

[00:15:47] Mike Vorster: Yeah, absolutely. Absolutely. and, you used the phrase a little while back of the, power of sunk costs. All right. And the sort of curse of sunk costs. and yes, it might be MBA 101, but MBA 101 is also predicated on rational decision making, right? And so when we get into, perhaps MBA graduate school, we'll start recognizing that we're not rational decision makers and that sunk costs have power, and under that heading, I've got another phrase that I, frequently use, and another situation that I frequently come across, and that is, "I'm going to do everything I possibly can to make my prophecy come true". And, we make a lot of decisions, and we do a lot of things under the heading of "Making My Prophecy Come True". And again, it's all about how, scary or how at risk are you at a personal level or a career level or a futures level? Because we know another thing that we know is that organizations which don't permit failure or don't accept failure and organizations which punish failure fairly harshly are going to get into situations where people struggle to, and work very hard to make their prophecies come true.

So you're not going to get these adventurers and early adopters that we've been talking about. you're not going to get the folk who take the big risks and, harvest the big rewards. You're not going to get them in organizations where, the punishment system is, is fairly aggressive.

[00:17:51] Oded Ran (Clue): Absolutely, and, in the context of people not like thinking about this, being aware of this. What should someone do? Maybe it's in their, in the back of their mind next time to make a decision. is that just, something we're doomed to live with? Have you seen examples of, of managers or people that, were able to, overcome this, automated risk aversion mechanism in our brains?

[00:18:25] Mike Vorster: The success stories that I've come across, have, pivoted around the fact that there's a decision which could be made very conservatively. and no risk, no reward. And then, or little risk and little reward. And then there's another decision which is slightly off the beaten track.

Where there's significantly more risk, but the chances of it being, more right. And the reward being higher is significant. I think be frank about it, talk about it, discuss it. And say, is this really something we as an organization, we as a team want to do? because, I think one will be, the success stories I've come across.

It's been surprising how often when the conversation is, on top of the table, which is of course where we'd like all conversations to be, but the conversation is on top of the table. There are very few successful

chief executives who don't recognize the risks involved, evaluate them properly, and, and accept them on their merits.

And so sharing risk is between colleagues is, I think, the first thing you need to do.

[00:19:52] Oded Ran (Clue): And you also mentioned really management. Because it feels certainly when, you're the place where you're climbing in your career and you meet a level manager, but you're not on the owner level, that consideration of having made decisions that ultimately you need to admit, in retrospect, I've been wrong or need to be revisited.

That takes quite a lot of, either professional maturity or a level of comfort that you can admit it and, progress, whereby that's potentially something that if you're coming more from an ownership perspective, or you've been around for enough time to, be confident in your worth, you probably a bit more comfortable doing so.

Is that, also some, something that you've noticed in the, in the difference between, different tiers in the organization management?

[00:20:42] Mike Vorster: Oh yeah, absolutely. I think that as your career builds, and I think as you develop confidence and strength within your career, the, the propensity to take a risk and the propensity to discuss risks and the propensity to share the risks you're taking, grows. In the beginning, we want to be a hotshot.

We want to come out with a significant victory. I think. I think understanding the risks involved is part of growing up, it's part of maturing, and it's part of, developing and building your, your career. What if I say there are no old jet fighter pilots, right?

[00:21:32] Oded Ran (Clue): So this was really a pleasure. I want to end with something that I think, might be relevant for this. One of my mentors shared with me, something, a good few months ago that I wish I heard years ago, maybe 20 years ago. And that was, really in the context of risk taking.

When you're trying to improve your operation yourself, something you're working on, we often end up speaking with peers and looking what's around. But it seems that we often veer towards other people who also haven't necessarily achieved what you're trying to achieve. And, these are the folks we typically, speak with.

And, that, sometimes inhibits the ability to move forward. And the advice was, if you want to achieve something, you really ought to, find and only take advice from someone who has done it, who has achieved it, and, if you cannot find someone like that, set your own path. And, it's much easier said than done.

And, I thought, I'd share that, get your

[00:22:37] Mike Vorster: yes, absolutely, it's, if you're going to climb the mountain, it's really important to have, to speak to someone who's been to the summit before. And so yes, gathering information, speaking to people who've, who've walked the path in front of you. Learning as much as you can is, is, as you've mentioned, critically important, but I'm going to mention something which came to me just the day before yesterday, which has been occupying my mind for the last couple of days.

And that is, the difference between the truth and the whole truth. And perhaps this business of, we, wanting to do this, we wanting to take this, take this decision, and I'm telling you about the decision, but tell me about all aspects of the decision and also the risky or the risks involved with the decision.

And the conversation pivoted around the fact that the gentleman was talking,

a person I was talking to was saying that he's. working with a bunch of people who never tell a mistruth, but they seldom, if ever, tell the whole truth. And I think if we're talking about risky decisions, the risks involved in a decision, is part of the whole truth associated with that decision. And so I'd like to add that little pebble to the conversation we're having, because it's something, we tell the truth, but the question is, do we tell the whole truth or must we have the conversation about the risks involved and the uncertainties involved? Must we have that conversation hammered out of us, right?

And I think that's a big danger to hide uncertainty, in the guise of confidence. There's nothing wrong with being uncertain. and, if you're not, if you're not certain, don't, hide your uncertainty in the hope that you will be showing and illustrating a level of knowledge and confidence that you don't necessarily have.

[00:25:10] Oded Ran (Clue): Thanks for sharing that, Mike. It's wonderful. So I think, we can maybe, call, start calling the series Practical Philosophy for, Heavy Construction or Practical Philosophy for Equipment Managers. certainly, I think there's both, learning elements here and very practical things we can do once one is aware of, of these biases that we're covering.

You brought up another thing that I think we can discuss next time we chat about, truth and the whole truth and nothing but the truth. Anyone's watching this, add some comments, whether you're watching this on LinkedIn or YouTube or social media, add some comments to give us some feedback, if this is helpful, this is, useful and, Mike, I really look forward to having another session with you and let's, we're going to do the next one, we don't need to wait five more years.

We're going to do the next

[00:26:01] Mike Vorster: Let's do the next one sooner, Oded, and I really, like I said at the beginning, enjoy spending, having far reaching, deep, meaningful conversations with you because so many times we spend so much time sort of skidding across the surface and, not getting into the, the depth of things and, of course by the time your hair becomes the color of mine, then, then you can talk about things like which, like we've just been talking about.

[00:26:34] Oded Ran (Clue): I'm really grateful, Mike.

Have a great weekend. Thanks for, for spending this time with me and with everyone listening.

[00:26:39] Mike Vorster: Same to you. Always a pleasure, Oded. I appreciate it greatly.

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