The OODA Loop: How to turn uncertainty into opportunity
As the world moves faster and faster, we need to improve our ability to change our minds based on a changing reality. By doing this, we can turn uncertainty into opportunity and ambiguity into advantage.
OODA is a model of individual and organizational learning and adaptation to do just that.
The OODA loop is a decision-making model developed by military strategist John Boyd to explain how individuals and organizations can win in uncertain and chaotic environments. It is an Acronym that explains the four steps of decision making:
It is a description of a process that you are already doing every minute of every day.
Let’s say it’s Saturday morning around 10:00am.
- You observe that you are hungry.
- You orient by remembering there is a Chick-fil-A down the street and it’s before 11am which means they are still serving chicken biscuits.
- You decide to go to Chick-Fil-A.
- You act by going to Chick-fil-A and eating a delicious chicken biscuit (or maybe two, why not, you’re already there).
Let’s incorporate some of Boyd’s thinking about how to use the OODA effectively, applied to a real-world business situation.
Observe means more than just “see.” It’s something more like “actively absorb the entire situation.”
Observation includes not only your own situation, but also your opponent’s situation and the environment more broadly. It includes all the dimensions of that environment: the physical, mental, and moral dimensions.
The observation phase is really data gathering in the broadest possible sense of the term. You are not just looking at your own numbers on a screen. You are looking at the emotional context, industry trends, and your competition’s moves.
Imagine you were a perceptive financial trader that understood the OODA loop in the run-up to the 2008 financial collapse. In the observation phase, you saw that the market was on its way towards record-highs. You recognized and felt the mental dimension.
Many people felt the market could only go up.
You saw there was a huge increase in financial instruments including mortgage-backed derivatives. You saw that many of the people who were taking out mortgages had much lower incomes than people taking out mortgages did five years earlier.
Orientation is the most important part of the OODA loop.
It includes understanding your genetics, cultural heritage and previous experiences, then analyzing and synthesizing that with all the observations you have made.
The goal of the orientation phase is to find mismatches: errors in your previous judgement or in the judgement of others. As a general rule, bad news is the best kind of news because as long as you catch it in time, you can turn it to your advantage.
Continuing with the financial trader example, you oriented and suspected there was no way all those people were going to pay off their mortgages. Many of them were lower income individuals with unsteady jobs. You saw that everyone, from homeowners with multiple mortgages to large banks, was betting on the market going up indefinitely.
You hypothesized that this was irrational exuberance, and no market goes up forever. You thought once some people started to default, many others would as well and that the market would crash.
You discovered a mismatch: the widespread belief was “people don’t default on their mortgages,” but your orientation based on the information you gathered during your observation suggested otherwise.
The 2008 Financial collapse was bad for everyone except the people who saw the mismatches.
The goal you should be striving for in the orientation phase is to prove your previous beliefs wrong by finding mismatches.
The sooner you can identify a mismatch, the sooner you can re-orient to take advantage of it. The trader saw a mismatch, shorted the market, and made money.
The Decision stage is the transition into the final stage of acting.
For groups or organizations, the decision stage may require a series of meetings or discussions to adjust the strategy and roadmap based on the new orientation.
If you were a trader in 2008, you might have had a meeting with your team to explain your reasoning in the orientation phase and come to a decision about exactly how to bet against the housing market. Should you short the mortgage derivatives themselves? Or the banks holding them? Should you do it now or should you wait a month?
For an individual, it’s usually unnecessary to have an explicit decision. You don’t need to call a board meeting to go to Chick-Fil-A, you just get in the car. Most decision making can and should be implicit.
Acting is simply carrying out the decision.
In the trader example, you click the button or make the phone call to bet against the housing market.
Then the OODA loop starts all over again. Your action to bet against the housing market will have popped up on other trader’s screens. That may or may not change their actions. In either case, you observe what happens, orient based on the new information and go through another OODA loop.
Everyone’s brain works this way; however, most people just do not do it well.
There were tens of thousands of traders who had access to all the same data that didn’t bet against the housing market.
Orientation shapes the way we observe, the way we decide, and the way we act.
In our 2008 global financial crisis example, the information used by the traders who bet against the market and made fortunes was not secret or proprietary information. Everyone in the industry had access to the mortgage contracts and the data about how many loans were being made to people with lower incomes.
They were all equal coming out of the observation stage.
However, most people failed to orient well. Instead of looking for mismatches, they looked for ways to confirm what they already believed.
This is called confirmation bias and is a well-researched cognitive bias that we tend to look for and filter information which confirms our pre-existing beliefs instead of looking for mismatches.
This one example has probably already got you thinking of some ideas for things you could do differently and ways to incorporate the OODA loop into your professional role or personal life.
We feel so strongly about the merit of the “OODA” loop that we wove it into our company name. Decooda is a combination of the word “Decode” and OODA. It describes our unique way of decoding signal from noise in an ambiguous world of customers, products, services, and experiences to become the most trusted source for accurate insights and solutions that lead to the best possible understanding of why market events unfold as they do at any moment in time and what you should do next.
To read “The Ultimate Guide to the OODA Loop” by Taylor Pearson, please visit: https://taylorpearson.me/ooda-loop/
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