Why do some Revenue Management Professionals take more risk than others?
As a Revenue Manager, I did all I could to mitigate risk. I researched internal transactional data such as day of week, month, and seasonal performance. I had pivot tables charting the channel of booking, segments, room types, and more. I would sift through a labyrinth of external data like flight traffic, weather, supply pipeline, events, and any other demand information I could uncover. I benchmarked anything remotely benchmarkable using data points such as historical performance, public pricing, online review sites, brand lookalikes, marketing data, etc. Yet, even after all that detailed analysis, research, and education, Revenue Management boils down to one thing: a prediction. Sometimes we get it right, sometimes we get it wrong. And the quality of our prediction determines the quality of our results much like decision-making in real life.
So what drives a Revenue Manager's propensity for risk? Why are some more audacious than others? In this edition, we explore the mind of a Revenue Manager's boldness, we delve into their relationship with uncertainty, and we attempt to decode the enigma of risk and reward.
In 2021, I took a sabbatical in Mexico to research and write my debut book on decision-making. The journey began by interviewing leading neuroscientists and psychologists to understand what takes place in our minds when making a decision. At the heart of our choices lies a set of mental scales we all possess.
We all know that the ability to maintain an accurate forecast determines the quality of our pricing, restrictions, and ultimate strategy. Similarly, how well we maintain our mental scales will determine the quality of our choices, consciously and unconsciously or rationally and intuitively.
As Revenue Management professionals, we are largely logical thinkers. We seek right and wrong and tend to operate in black and white. However, just as there is uncertainty and grey in our forecasts, there is also uncertainty and grey when we make choices especially when interacting with colleagues on strategic long-term decisions usually representing more uncertainty and risk. Before we get to the grey, let's first understand how the experts describe decision-making and our mental scales.
What is a Decision?
Put simply, decision-making stripped back to its rawest state is the pursuit of an expected value. When there is more than one option to choose from, we subconsciously or consciously weigh the options on our mental scales, applying an expected value to each. The highest expected value is usually the option we select as our decision.
Consider deciding at what price to accept a group. We calculate the displacement using a forecast of sold rooms at a calculated price we expect to sell at. Our displacement tool returns a break-even price point - going above the break-even price point is where we want to be. Our brain works in a similar fashion by weighing multiple options and choosing the highest expected value. Except, there is no calculated forecast to create a black-and-white situation so we have to rely on our mental scales to assess.
How Do We Assess Expected Value?
For the formula geeks out there; expected value is attained by determining the actual value of an object multiplied by the probability of reaching that value. So, I like wearing a navy blue shirt because I feel confident and assured when I wear that color. I get positive feedback when I wear a navy blue shirt, so others reinforce my assurance, and navy blue has the highest weight on my mental scales. Navy blue also distorts sweat should it be hot outside or if I happen to get nervous. I can’t see much room for that choice to go wrong. Therefore, with a high probability, I anticipate being satisfied with the decision to wear a navy blue shirt.
How Do We Reach the Value?
Value isn’t just the cost of the item. We all have things at home that have inherent worth or sentimental value. In the case of my navy blue shirt, I value the assuredness; however, my assuredness is disconnected from the retail price of the shirt. Consider an ugly floral patterned shirt you received from a grandparent that wouldn’t usually appeal to you. Because of its inherent value, that shirt might weigh much more on your mental scale. So, value can be variable according to several determining elements, including the accompanying intrinsic worth.
So, What is Probability?
Probability is the odds of something being reached—think about the odds on a roulette wheel at a casino. Choosing the ball to land on a red or black pocket offers a 1:1 payout because almost half the pockets are red, and nearly half are black. But selecting a single number such as the number 1 offers 35:1 as there is much less likelihood of the ball landing on that single pocket.
What is Happening in the Brain?
Everything described so far mostly happens in the brain’s prefrontal cortex—the part of the brain responsible for logical decision-making. You could think of the prefrontal cortex as the Director or Revenue inside the brain.
Much like the Director of Revenue, one of the brain’s core functions is predicting outcomes. Therefore, we develop memories and store them in a bank of data about our past events. These memories are stored within our limbic system, which helps us form and retain memories. The prefrontal cortex then draws on those memories from our limbic system to help us predict what will happen in the future.
So there it is; the formula for decision-making. But what about the grey areas or the doubt or uncertainty we experience when making a choice with a less accurate forecast or mental scale?
The Grey in decision making
We now know that a decision is an assigned expected value, and we get to the expected value by multiplying the actual value by the probability of obtaining that value. Armed with this information, we must determine if the equation meets our decision threshold.
What is the Concept of a Decision Threshold?
Internally, we all have a decision threshold. When the threshold is reached, we can easily decide between multiple choices by selecting the option that most exceeds our decision threshold.
Consider my shirt decision; besides damaging my navy blue shirt en route to dinner or drowning the shirt in a glass of red wine, the probability of realizing the expected value is high—let’s assume it’s 95%. If my decision threshold is 80%, then it’s an easy decision, as I have exceeded the decision threshold. If I have an unusually high decision threshold of 96% I will be concerned that the risk of damaging my shirt en route is just too high, and I will have trouble deciding which shirt to wear. When I do attend the dinner, I will be stressed about what might happen and won’t enjoy the night.
People with a high decision threshold often get caught in indecision, but when they do eventually decide, their choice usually has a high probability of realizing the expected value. It is a safe but stressful existence filled with doubt, hesitation, and a low level of living, trademarked by a lack of progress.
Conversely, an overly low decision threshold can lead to irrational decisions and a higher likelihood of not realizing the expected value. It can be a reckless and destructive existence, leading to many undesired outcomes.
How do I lower my decision threshold if I am often indecisive?
Science is yet to categorically determine why some people have a low decision threshold and others are unusually high. There is also no clear perfect threshold. However, information stored in the limbic system is known to impact thresholds both positively and negatively. If you find yourself often caught up in doubt or hesitation, begin by building a foundation of confidence.
A simple way to start that process is to teach your brain to be confident in your actions. It takes time to reinforce and engrain but begin by writing down 5 tasks each morning and then completing those tasks. At the end of the day, tick those tasks off and your brain will gradually begin to understand that what you predict for the day, happens. This is a basis of manifestation but your brain is a living organism and it simply observes your reality.
You may also need to address and justify actions that didn't go your way in the past. Perhaps you were scolded for a poor forecast and poor group pricing decision. Recognize that you made a forecast with the information you had at the time, and if you knew better, you would have done better. Apportioning logic and removing your own fault from a situation will signal confidence in your brain. Confidence is critical to maintaining a healthy decision threshold.
Assessing Value Leading to Indecision
Another challenge that leads to indecision is the problem of assessing value. Many times as a Revenue Management professional, values change with time - evolving value is also why many of us fall into indecision over prolonged periods. In a rapidly changing marketplace, conditions and data points may likely never stand still, meaning the value is in a constant state of evolution. Probability appears lower, and we question our predictions, but at a certain point, we have to accept the limitations of available data and take a position at a point in time.
Changing values is why we can regret decisions made as further information becomes available, adding weight to the opposing decision. Continuing to seek information after a decision has been made is a sure way to create doubt in your decision when it is no longer actionable. Repeating such behavior establishes adverse neural pathways in your brain, subconsciously forcing your decision threshold even higher in the future. You will become more and more uncertain of your decisions, and a pattern of hesitation will emerge and grow. This is why the golden rule of decision-making is to make your choice, commit to it, and act with conviction without even a glance in the rearview mirror. If circumstances evolve, learn and iterate. But stick to your end goal and have confidence in your choice.
Sometimes for a Revenue Management professional, it can be less about making the right decision and more about making the decision right.
If you want to know more about improving your mental scales and confidence, grab a copy of my book, Flip and Decide with Confidence available on Amazon and all good bookstores. A confident Revenue Manager with strong decision-making skills is an invaluable Revenue Manager who won't go unnoticed.
About the author: Rob Paterson was a 15-year veteran of Revenue Management before entering the C-Suite and eventually being named CEO of Best Western Hotels Great Britain in 2018, a role he occupied for almost 4 years. He now resides in the US and is the founder of the Grind Leadership Academy and Elite Revenue Management Community. To learn more about how Grind Leadership Academy can help elevate yours' and your company's performance, check out the services page and schedule a call or join one of the performance ally coaching programs listed at the bottom of the page.
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