How would Socrates run a Fortune 500 company? While philosophy is not generally viewed as a business tool, in fact the rigorous application of philosophical approaches, such as the Socratic Method, can be of great use in improving business decision-making.

Theaetetus, I have the heard the view at times that philosophy and business are fundamentally incompatible.  This is because business is perceived as representing the tangible exercise of economically valuable action while philosophy, on the other hand, is viewed as pointless, time-wasting reflection on issues without answers.

The reality, however, is that rather than being diametrically opposed, philosophical reasoning and business action can be very mutually reinforcing.  Far from the halls of academia in the board rooms of companies, systematically tying philosophy and business action together can help people facing crucial business decisions make better choices.

Business Uncertainty and Philosophy

As essentially all business involves some form of action, it stands to reason that a major component of business success is acting wisely. The challenge in making wise decisions is that we often have to make choices with incomplete information, limited time and resources, in the face of multiple and conflicting opinions about what course of action is best and constantly changing internal and external conditions.  These factors combine to create a significant opportunity for decision-making error.

It is precisely in the face of these decision-making challenges where levels of uncertainty increase that philosophy can prove to be practically useful.  Understanding how this can be the case requires reflecting on what the function of philosophy is.  While philosophy is often viewed as system of ideas or a way of explaining the relationship between elements of reality, it is also a very practical method for examining methods of reasoning and testing claims about what is true in the world and what is false.

Every business decision, of course, is based in some way on claims about what is believed to be true.  The statement that a firm should raise capital is based on the belief that raising capital will create value for its shareholders; the statement that a firm should invest in R&D is based on the belief that this will increase the chances that the firm will be more productive or competitive in the future.  Once philosophy is seen as a potential tool for testing claims about truth and business decisions are viewed as being based on claims about what is true, philosophy can be then be used to test the basis for business decisions and strengthen them.

The Socratic Method

The very first step in the application of philosophy to business is to require a clear statement of the bases of decision-making.  A statement such as “I believe that oil prices will go up” on its own from a philosophical as well as a business perspective is of limited value because, while it sets forth a conclusion, it does not contain any description of the basis of the reasoning for the conclusion which can be used to test it.  For the purpose of creating a dialogue that can lead to better conclusions, it is much more useful to say that I believe that oil prices will go up for reasons x, y and z.

The second step in the application of philosophy to improve decision-making is to actually test claims about what is true and discard what is false.  While there are many ways that this can be done, one way of testing claims is through the Socratic Method, used as the principal method of inquiry in the works of Plato, which involves trying to find what is true by positing the opposite of what is believed to be true.  The reasoning behind this method, which underpins to this day legal reasoning in common law jurisdictions, is that the clashing of opposing perspectives will allow the truth to emerge.

Let’s take a practical example. If we were to make a statement that oil prices will go up by 5%, we might state that we believe this is true because:

• We believe that global GDP will increase by 2.5%

• We believe that oil production will decline because of war or unrest in an oil-production region

• We believe that the pace of implementation of alternative forms of energy will substantially slow and this will create additional demand for traditional sources of energy

The idea of the Socratic Method is to attack these claims not with the view to be obstructive but rather in an attempt to test them and continually unravel their own premises until one can get as close as possible to the hard bedrock of verifiable facts. 

One way to do this is to attack the premise of a statement.  For example, this could lead to us suggesting that even if global GDP increases by 2.5%, it will not be sufficient to produce a 5% increase in oil prices.

Another way to attack the statement is to say that even if oil prices rise by 2.5%, various other factors will prevent the price of oil from rising by 5%.

Yet another way to attack this statement is to argue that, even though the posited relationship between GDP and price increase is sound, GDP will not rise due a number of different reasons such as:

• Credit cost will rise

• Production will fall

• Government investment will fall

Once these claims are set forth, it then becomes possible to test them more rigorously.  For example, with respect to the argument that a GDP increase of 2.5% will not cause oil prices to rise 5%, we could analyze the historical relationship between GDP growth and oil prices and make some initial baseline statements about how they appear to be related and use those statements to test our price forecast.

If the argument is that other factors will cause oil prices not to rise, these also would be set forth and challenged one by one to test their relevance and accuracy.

If the argument is that credit costs will rise, we could then systematically analyze the key factors related to credit pricing, such as central bank interest policies, interest rates and inflationary or deflationary pressures.  Each of these factors could then be examined.

The point here is that business decisions can be systematically converted into claims about different elements of the world, these claims can be broken down into progressively narrow statements about reality (such as with respect to human behavior, social conditions, economic relationships and government activity) and these claims can often be tested with increasing precision.

A Time-Series Approach to Socratic Reasoning

The nature of markets create several types of challenges for applying philosophical reasoning to business decision making.  The first of these is of course that markets, rather than representing universally fixed qualitative or quantitative relationships, do not stand still; because GDP and oil price information is constantly changing, what is often useful for decision making is not single point snapshots of pricing information or correlations but rather how different types of variables tend to move with or against each other a certain period of time. 

To do this we must be able to challenge the bases for a particular decision not merely at one point in time but rather over a defined time period when many other variables may also be changing.  Many poor business decisions are made because that it is assumed that economic or financial relationships that hold up at one point in time will continue to remain that way in the future.

A second major challenge with respect to the application of the Socratic Method in a complicated business, economical or financial context is that there may be many factors responsible for results other than what is posited in our statements about what will occur.  In other words, the price of oil may have risen exactly as we have predicted but the reasons for this increase may have nothing to do with what we have suggested.

Because of this we have to be willing to continually test and retest business and market hypotheses as they evolve over time and remain equally as sceptical of what appears to be right as what appears to be wrong. 

This testing process is just as important as specific conclusions that are reached because it allows a record of a firm’s reasoning to be created which can be used in connection with the analysis of future potential decisions.  If as a firm we make decisions on three separate occasions based on the view that a rise in credit costs will slow oil demand and in fact oil demand still continues to increase, that hypothesis would reasonably be viewed with increased skepticism the next time a forecasting decision was made.

Individuals and firms can have very short memories and a formal process of recording decisions, why they were reached and how accurate they turned out to be can helpful provide a useful counterpoint to the emotions and excessive hopes and fears that can affect the decision-making process and lead firms down the wrong path.

Conclusion

The challenge for any decision maker is to make the best decisions possible under the circumstances.   While the ordinary bases for business analysis, such as gathering data and making projections, will always be helpful, I argue that philosophy can also be very useful in challenging the premises for decisions, making better decisions today and providing a better framework for decision making processes and business action in the future.