Amazon’s Jeff Bezos just published his annual letter to shareholders, and new this year is a lot of talk about how Amazon calculates big risks.
He first notes that Amazon is the best place in the world to fail because the company is willing to take big risks with the knowledge that 90% of them will fail.
But then he goes on to carefully distinguish two kinds of decision-making that affect how he thinks about risks.
Type 1 decisions are not reversible, and you have to be very careful making them.
Type 2 are like walking through a door — if you don’t like the decision, you can always go back.
The problem comes from confusing the two, Bezos writes:
As organisations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention. We’ll have to figure out how to fight that tendency.
And one-size-fits-all thinking will turn out to be only one of the pitfalls. We’ll work hard to avoid it… and any other large organisation maladies we can identify.
In a footnote, he acknowledges that taking Type 1 decisions lightly is an even a bigger mistake:
The opposite situation is less interesting and there is undoubtedly some survivorship bias. Any companies that habitually use the light-weight Type 2 decision-making process to make Type 1 decisions go extinct before they get large.
Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.