Harvard's Judgment Professor: Why Numbers Don't Make Decisions, People Do

0:02Judgment is not something that you can observe or that you can learn through osmosis. It has to be done by actually exercising it and making decisions, stepping into risk, and thinking about what the consequences are of those.

0:24That was Reza Satchu, serial entrepreneur, investor, and senior lecturer at Harvard Business School, on why judgment, not numbers, is the thing that most investors overlook. I'm Motley Fool analyst Rachel Warren. Reza has built six companies across multiple market cycles, achieving billions in exits, and teaches two of Harvard Business School's most popular courses, the Founder Mindset and Founder Launch. I sat down with Reza to talk through why judgment is becoming the scarcest asset in the age of AI, whether it can be taught, and how he personally walked away from a billion-dollar buyout offer and made it pay off.

0:58We hope you enjoy part one. Welcome back to Motley Fool Conversations. I'm Rachel Warren. When we evaluate businesses to buy and hold for the long term, we often spend hours poring over income statements, balance sheets, cash flow trends, and that's important. But numbers don't make decisions. People do. And our guest today argues that investors often spend more time studying a company's numbers than evaluating the judgment of the people deciding what happens to those numbers next. Reza Satcho is a serial entrepreneur, investor, and senior lecturer at Harvard Business School, where he teaches two of the university's most popular courses, the Founder Mindset and Founder Launch.

1:34Over Reza's career, he has built six companies across multiple market cycles, achieving billions in exits. He is the founder and managing partner of AlignVest Management Corporation and the host of Harvard's The Founder Mindset podcast. Rezo, welcome to the show. Thank you, Rachel. Thanks for having me. I want to lean a bit into this core idea that investors often spend so much time studying a company's numbers, but maybe not so much evaluating the judgment of the people deciding what happens next. And I'd love to hear your thoughts on why do you think that the investing community or the markets in general tend to be so hyper-focused on the math but often ignore that human judgment as driving it?

2:14Look, I think it's a great question, Rachel, and I've spent a lot of time thinking about this. And, in fact, if you think about the courses I teach, some would say, well, Raisa, why are you so focused on the mindset and not on the venture? Because ultimately what I'm trying to help is students launch their ventures. And what I would tell you is having done this, this is my 24th year teaching, there is far more traction and learning and improvement of probability of success that I can have by evaluating and improving one's mindset, okay, as opposed to spending a whole bunch of time evaluating their business.

2:46And so what that really means is what is that characteristic in the mindset that we're looking for? And it all comes down to judgment. And I'd say it's even more important in the age of AI where so much can be replicated other than judgment. And so there's no question that judgment is something that investors, employees, customers are desperately trying to evaluate. The question is, how do you evaluate it? How do you build it? And what I would say is that judgment is not something that you can observe or that you can learn through osmosis. It has to be done by actually exercising it and making decisions, stepping into risk and thinking about what the consequences are of those.

3:26So I think, first of all, everyone agrees. I think people would agree that judgment's very important. I think the reason the market shies away from it is because it's so hard to evaluate it. It's a very hard, it's sort of this thing that you can't actually put math around. But if I had to say, what is the single most important thing that I'm looking for when I make an investment in a business or whether to spend time with a founder or not? It is my evaluation of their judgment. And invariably what that is, is evaluating previous decisions that they've made and understanding how they calibrated risk and trusted their judgment in that decision.

4:02Well, and that kind of leads me into this idea. How do you define the anatomy of good judgment? What are the differentiating factors you look for? Okay. So the first thing is, let's just say you can live a life where you never really make a decision, right? You sort of let things happen to you and things sort of the status quo stays the same. And most people, frankly, see an idea and just assume that there's no way that they could possibly that could be a real idea because they don't have the resources to. And I'd say every business, you know, if a founder felt that way, that business wouldn't exist today.

4:36OK, meaning I often say to people that you really want to be opportunity driven and not resource constrained. But to your question around what does it look like in terms of how do you actually build or exercise judgment, at the end of the day, it's really around are you putting yourself in situations where you're making real decisions? Are you actually feeling the risk calibration? I also would say to you that there's a, you know, there's so much of human psychology here where human beings massively overestimate their downsides, typically, in terms of what they're capable of when they actually commit to things and underestimate the upside nodes.

5:13And so what ends up happening is I have a phrase which says, if in doubt, act. OK, now, some people would say that's very reckless. I'd say it's not reckless at all. I may decide to stay with the status quo, but I'd much rather say I'm making an active decision, trusting my judgment to go with the status quo, as opposed to what most people do, which is sort of a deer in headlight approach where you just kind of sort of freeze or get paralyzed and just stay the course. And so I think this active learning by doing where you've got someone who's actually, frankly, living a life where they're constantly stepping into risk, seeking risk and calibrating it and making decisions is what I really look for.

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7:58and I really believe much of this is learnable. Meaning I don't believe that people are born with this certain trait where that allows them to lead or to found. Meaning I've seen too many stories of people who have come from backgrounds and situations where you just think, wow, they are not going to be able to rise up and lead. And frankly, sometimes it's precisely because of that adversity that they have been able to lead. But my point is, is I do think that it's teachable. I do think people can choose to learn it. And I will give you an example. So you could imagine in today's day and age, you could almost think about what is learning today.

8:40And so it used to be memorization. It used to be sort of listening to a professor lecture. I would actually say all of those skills are replicated far better by AI. Okay. Learning today is making consequential decisions that you are accountable for. Because it's in those moments where you're calibrating risk and trusting your judgment. And I believe judgment is much more like a bicep than it is sort of this thing you get at birth. Meaning I believe the more you exercise it, the bigger it gets. So what it means is you must seek risk. You must seek discomfort. You must push yourself into situations of uncertainty where you are being forced to test and trust your judgment.

9:23One thing that's interesting that you mentioned briefly earlier, this idea that executive judgment becomes drastically more important in the age of AI. There's so much data is commoditized. I'd love if you could lean a bit more into your thoughts on that. Yeah, yeah. So I think actually how you've articulated it is dead on, which is that data is becoming more and more commoditized. There is no differentiation when it comes to sort of math and numbers and sort of raw intellectual horsepower, okay? The differentiation is in taking that data and figuring out what are you going to do with it, okay?

9:58And what are the judgments you're going to make around that? And so I think, you know, I often say that when I look at the lens from a founder, which is really no different from a CEO of a public company, If I had to say, like, what are the differences in terms of when I evaluate founders versus a CEO of a public company in this day and age, it's really around if I had a crystal ball, if there was one trade I could measure in order to give someone a dollar, it would be judgment. It would literally be judgment. OK. And so what I'm constantly asking founders is tell me how you're exercising your judgment.

10:31Tell me about time, what you learned from flawed judgment. Tell me, you know, how you benefited from actually stepping into the arena and making these decisions. OK. And so I think the first thing about judgment is you have to actually want to exercise it. Like, you know, the thing about judgment is there's a downside to judgment, right? Like there's a downside in that you may get it wrong. That's why it's a judgment. And so it's not costless. But I'd also say that it is incredibly arrogant to think that you could have any outperformance or impact without calibrating and seeking and operating with risk, right?

11:07The world is too efficient to do that. And so it's become a world where it's judgment that becomes the sort of marginal differentiation. And so the fascinating part here, Rachel, is how do you evaluate it? How do you know when someone – because there's no Excel spreadsheet that's going to give you the answer to this. It's your own judgment on someone else's judgment. And so but but here's what I will say, and you see it with, you know, people like Elon Musk or Jeff Bezos or Michelle Zatlin at Cloudflare, which is I also believe judgment isn't linear. I think it's exponential, meaning I think the reason you can see Mark Zuckerberg's never managed anyone and suddenly builds Facebook and at the age of 30 is managing 10 ,000 people or whoever it may be.

11:55It's because of the cumulative decisions that he or she is making in that arena. OK, and and that's leading to better and better judgment precisely because you're effectively going to the gym more often. Right. You're effectively exercising that judgment more often. Right. But I do think the impact of AI is just massive efficiency and massive commoditization, to use your word, which therefore will only leave, in terms of outperformance, will lie in people's interpretation and judgment of data that's available to everyone.

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13:56Going back to this idea of operating on calibrated risk rather than fear of regret. I was reading about the sale of AlignVest student housing. The$0.7 billion deal. And I was reading the story behind this, that initially there was a buyout offer that exceeded a billion. Almost everyone around you told to take it. You walked away and then closed the sale for$1.7 billion. How do you tell the difference between holding out for true upside, again, this idea of calibrated risk versus potentially succumbing to concerns and judgment? Right. You know, it's interesting. I actually taught this case. I teach this case to my class at Harvard Business School.

14:32And literally 100 % of my students say you should sell at$1.1 billion. dollars. Okay. Meaning they were like, you make a lot of money. It's a, you know, we had both Blackstone and TPG as bidders in that business at the time. Okay. So, um, but, but here's what I'd say is from my perspective, you know, I'm the founder of the business, the controlling shareholder of that business. And so I have a lot of information. Okay. You know, there is, I have this phrase, which is like tension is your friend. Okay. Meaning it's like love. You've got to walk away and it'll only close if someone really chases.

15:06Okay. So in this case, I think I, you know, I'm a big fan of orchestrating tension in any sort of a deal. And, and so I think here, I felt like there was a lot left on the table. Um, and my partner and I felt like that we could, we could build more. Now there was risk, right? You could imagine that the market could turn or the buyers could go away. Um, but it was calibrated, meaning we were like the upside here feels like the downside was the bit we couldn't imagine the business trading it south of a you know at anything uh worse than a five cap which meant that our downside was that it was a billion dollar business okay so maybe we would lose a hundred million dollars of equity value but the upside was if we could actually execute on the things we could do there could be several hundred million dollars and so it felt like a very good trade okay and ultimately i think the other interesting thing I would say to you, Rachel, I've, I've, um, four of the five businesses I founded, I did not use a banker.

15:59Okay. An investment banker. So this is a billion and a half dollar deal with no investment banker. Um, you know, I'm a big believer in, you know, um, Paul Graham's calls it founder mode. I'm a big believer in founder mode, meaning like, why would I outsource one of the most important decisions of my founder journey to a 30 year old associate at Goldman Sachs, you know, who is completely conflicted and who just wants to get a deal done to get paid. And frankly, we'll do much more business with the strategic that's going to acquire me than with me. Right. And so I just think I think the more interesting.

16:34So, yeah. So I think I think from our perspective, it was it made sense. And I think we sold it at the right time. But I'd also say we we we were getting information directly from the sellers or from the buyers such that I could process it and make a decision as opposed to getting it filtered through intermediaries that may have a very conflicted situation. Meaning I'm entirely sure that if I had a banker at that point in time, I would have sold the business because they would have convinced me to sell it. Yeah. No, it's an interesting story. And I wanted to ask you about that. I think a lot of times as investors investing in public companies or otherwise, we often only see leadership through earnings calls.

17:17I want to talk more about maybe a framework for distinguishing genuine judgment, which we've talked about a bit, of course, today, from polished storytelling. You have a personal framework for that. So it's a great question. And I think a lot about this because you can imagine that, especially in the public scenario, you can polish it up in a way that it's very hard to discern. So the times when judgment matters most is in times of crisis, which inevitably happens to every founder and every CEO. So if I have one shot to evaluate someone's judgment, what I want to do is understand how they behaved in moments of crises okay when when it felt incredibly uncertain when the world wasn't the way it was supposed to be when they lost that major customer or their CTO went to another competitor or there was a scandal that happened something something that was unexpected that wasn't scripted that they can't sort of polish and in that moment of crisis, how did they behave?

18:36Okay, that's where I'm going very deep with someone. Okay, and same thing with the founder where that's the moment, the inevitable, because you know leadership only shows up in moments of crisis. I mean, when there's no crises, there's no, leadership isn't warranted. So the point is, is you want to know how people behave in moments of crises. And the thing about leadership is you and I both know that leadership is full of crises, like we're full of crises. And so what I'd be evaluating is how did they behave in those crises? And what I'd say, you know, I'd say that the thing about a crisis is it's not just downside.

19:16There's also tremendous opportunities that crises have. Okay. And so I'd say you're looking not just for how they were defensive in that moment and how they protected the franchise, but also what did they do in the culture or the organization to reposition it and take advantage of whatever that crisis was, such that their probability of success is better and they've emerged stronger. And so I think how people behave in times of crises, how leaders behave in times of crises, is critically important to evaluating judgment. That was part one of the discussion. Tune in next week for part two. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

20:02All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For The Motley Fool Conversations team, I'm Rachel Warren. Thanks for listening. We'll see you next time.

20:26Thank you.