While preparing for consulting case interviews (aka problem-solving interviews) in college, I always got one piece of feedback that felt particularly intangible: be more hypothesis-driven.

I have known what a hypothesis was since my 4^th grade science fair project. I always associated it with science, and as a business major, hadn’t given it much thought.

However, it wasn’t until after college that I began to fully understand the true power of the hypothesis and its relevance in everyday decision-making.

The hypothesis-driven approach to decision-making

During case interviews in college, I thought that being hypothesis-driven boiled down to two repeatable steps:

1. Make a hypothesis when you have enough knowledge to make an educated guess
2. Search for data that would strengthen / weaken it (and repeat steps 1-2 as necessary)

In the real world, however, there is a crucial additional step.

Here are the three steps to be an effective hypothesis-driven decision-maker.

Step 1: Create your hypothesis

First, you must build a hypothesis. A hypothesis is just an educated guess based on limited evidence, so even in the face of uncertainty, go out and make your best guess.

In speaking with ex-consultants and other effective decision-makers, I have always been surprised by how early they create hypotheses when faced with a difficult decision. They have figured out that it is better to make a guess early and be wrong than to spend time tackling a problem without focus.

Even if you don’t know much about a topic, I would push you to pick a side and make a hypothesis as early as you can.

Step 2: Develop the criteria you need to prove the hypothesis

Second, you must develop the set of relevant criteria that you need to prove your hypothesis.

A good phrase to describe these criteria is “what you would have to believe” in order for the hypothesis to be true. For example, if you hypothesize that you should buy a house rather than rent an apartment, the relevant criteria described in this step would be “what you would have to believe” in order to prove that you should buy a house. Examples of such criteria could include “the economics of buying are betting than renting” or “I expect the value of a house to rise 10% per year over time.”

This is the key step that I didn’t know in college and I truly cannot overemphasize its importance. This step is how you gain focus and clarity while making decisions in ambiguous situations.

Step 3: Evaluate the criteria to prove / disprove the hypothesis (and repeat steps 1-3 as necessary)

Finally, you must seek out information focusing on the relevant criteria in order to prove / disprove your hypothesis. By gathering targeted information only on the most important criteria, you can prove / disprove your hypothesis in a focused manner.

If you find information that discredits your initial hypothesis, you just repeat the process by changing your hypothesis and redefining / evaluating the key criteria as needed.

The power of the hypothesis

In my mind, there are two main benefits of being hypothesis-driven:

1. Faster results: By developing the list of relevant criteria, you can come to quicker decisions by only focusing your time / energy on the most important inputs.
   • Analysis: The 80/20 rule states that 20% of the work drives 80% of the answer. If you can get the “right answer” by only doing 20% of the work, why wouldn’t you? By focusing your research only on the most important factors, you can come to decisions in a much shorter time.
2. Better decisions: By putting more focus on the most important factors, you uncover more information about what really matters, leading to better decisions.
   • Analysis: You may not think that being hypothesis-driven could get you faster and better decisions. But I think it can. By developing a list of the most important criteria to test, you end up spending more of your time / research / energy on the important factors and less on the unimportant ones. Ultimately, you will make better decisions by dedicating your focus and learning towards the most important criteria.

Now, I’ll go over a couple of examples that show the true power of a hypothesis-driven approach.

Examples

Example 1: Business example

• Background: In college, I was the Chief Loan Officer for the Emory Impact Investing Group. In my role, I oversaw decisions to loan out $5k-10k to impactful small businesses in the Atlanta area. Our due diligence process, the process to judge whether we should give out a loan to the business, involved collecting financial and operational information about these companies for ~3 months.

• The problem: In hindsight, I had a “data collection” approach while leading the team, not a hypothesis-driven approach. While our due diligence process was supposed to take ~3 months, it often dragged on to ~6 months as we continued to collect information with the sole purpose of making the decision at the end of the process.
  • Back then, I hated the idea of building an opinion about a business before receiving adequate data to back it up. To me, that just felt like I was introducing my own bias into the decision. The result, however, was a process in which we collected information without focus – information that didn’t give us much more confidence when we eventually had to make the decision at the end of the process. We didn’t have a hypothesis-driven approach. In reality, we had the antithesis of one, which led to drawn-out processes and sub-optimal decisions.

• The solution: Here’s the process we should have set in place.
  • Step 1: After accepting these businesses into our due diligence process, we should have internally stated our hypotheses about each business (e.g., I think we should / should not loan out to this business) using our relevant knowledge of the industry and the entrepreneur’s interview.
  • Step 2: We should have stated the important criteria needed to prove our hypothesis. For instance, our criteria could have included “we believe the market will grow at X% per year,” “market share will grow at Y% per year,” or “we believe that the business is positioned for strong customer retention.” Each of these criteria would be based on the important characteristics of each industry / business. For example, for businesses clearly in high-growth industries, we could spend less time understanding the growth potential of the industry and more time understanding their positioning and ability to capture market share within it.
    
  • Step 3: We should have conducted targeted research into the criteria needed to prove the hypothesis. By publicly stating a hypothesis and zeroing in on the important criteria, we could have been more focused on what really matters and seen a quicker process with better results.

Example 2: Non-business example

• Background: Let’s go with a hypothetical that’s a little less business focused: “should you go to grad school?” On the surface, this is a tough question and an area with a lot of ambiguity. You could spend months thinking about this decision with little focus.

• Analysis: Here’s how I might tackle this situation with a hypothesis-driven approach.
  • Step 1: Based on my limited knowledge of grad school, I would hypothesize that I should go to grad school at some point in my life. In order to prove this, I would need to believe a certain set of assumptions (which would be inherently be different for every person).
    
  • Step 2: For me to go to grad school, I would need to believe that 1) I would enjoy grad school, 2) grad school would help me grow personally and professionally, and 3) these benefits would be enough to cover the cost of school.
    
  • Step 3: After this, I could conduct further research into each of these criteria by 1) talking to alumni about how much they enjoyed grad school, 2) researching professional opportunities with a graduate degree, and 3) calculating the expected costs / payoffs of the decision. This approach would give me a heightened level of focus and clarity that would lead me to a faster and better decision.

Parting thoughts

Being hypothesis-driven is a lot like building your point of view. It’s easy to be in a data-gathering mode and to put off making tough decisions. All of my life, that has been me.

But if you want to be able to make tough decisions in the face of ambiguity, you need to put your stake in the ground somewhere. Even if you have limited information, an initial hypothesis or point of view can help you be focused and more efficient in tough situations.

What do you think?