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

Reza Satchu (0:02)

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.

Rachel Warren (0:24)

That 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. We 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 pouring 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 Satchu 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. Over 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. Reza, welcome to the show.

Reza Satchu (1:48)

Thank you, Rachel. Thanks for having me.

Rachel Warren (1:50)

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?

Reza Satchu (2:14)

Look, 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, Reza, 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, as opposed to spending a whole bunch of time evaluating their business. And 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.

So I think, first of all, everyone agrees, I think people would agree that judgment is 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.

Rachel Warren (4:02)

Well, 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?

Reza Satchu (4:10)

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. Okay, meaning I often say to people that you really want to be opportunity driven and not resource constrained. Okay, but to your question around, what does it look like in terms of how do you, you know, 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? Okay, 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. And so what ends up happening is I have a phrase which says, if in doubt, act. Okay, now some people would say that's very reckless. I'd say it's not reckless at all. I'm just, 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. 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.