What it is

Imagine someone who knows everything: every fact, every number, everything that will ever happen. You hand them your question. Could they answer it with a plain yes or no, or give you a number, without asking what you mean? If they could, your question is clear. If they would first have to ask "what do you mean by that?" or "by when?", it is not clear yet. That is the clarity test.

For a business decision, write the question as one sentence. It names four things: who decides, what they will do, by what date, and which result will count as success. A question like that can be answered, and later you can check whether the answer was right. A vague topic cannot. A team can research it for months and never finish.

Where it comes from

The test comes from Ronald A. Howard, a professor at Stanford University. In 1964 he gave the field of decision analysis its name. He described the clarity test in 1988, in a paper called "Decision Analysis: Practice and Promise" in the journal Management Science.

To explain the test, Howard imagined a clairvoyant. This person knows the future: every newspaper that will ever be printed, every measurement that will ever be taken. Later Howard added that the clairvoyant knows everything that can be measured, but has no opinions. So the clairvoyant can tell you what happened, but not what you meant.

Howard used the test on every part of a decision: the options, the unknowns, the possible results and how you score them. A part passes when the clairvoyant could answer without asking a single question back. In 2004, in "Speaking of Decisions: Precise Decision Language", he asked for words about decisions exact enough to be checked. This guide uses the test on the sentence that states the decision. That is common practice, but it is not in the 1988 paper.

What it corrects

Trouble starts with a question that sounds important but does not name a choice. Take "Should we enter Europe?" A good team gets to work at once: it measures the market, looks at competitors, studies prices and checks the legal side. But nobody has said what exactly will be decided. So nobody can tell which research is beside the point, or when to stop. The meeting finishes with a summary instead of a decision.

Working harder makes this worse. The deeper the research, the more solid the topic feels. Nobody notices until late that the decision itself was never written down. There is a second problem. Two people can agree on the answer to a vague question while meaning different actions. Afterwards nobody can say whether the decision was right, so the team learns nothing from it.

How it works

Write the choice as one sentence: who will do what, and by when.
Say what the decision does not cover, and what stays the same while you decide.
Define success as a number that someone could read in a named report on a named date.
Imagine handing the sentence to the clairvoyant. Could someone who knows every fact, but has no opinions, say whether that result happened? Fix every word they would have to ask about.
Check that at least two really different actions still fit the sentence. If only one fits, you have written a plan, not a decision.

Worked example

"Are hedge funds worth their fees?" is the kind of argument that can go on forever. Hedge funds are investment funds for wealthy clients, and they charge high fees. On 19 December 2007 the investor Warren Buffett turned it into a bet that could be settled. He registered it on the website Long Bets. The S&P 500 is an index of 500 large American companies. Buffett bet that over ten years a fund that simply tracks it would beat a group of funds that invest in hedge funds. All fees, costs and expenses would count.

Every word of the bet could be checked. The index was named. The other side, the firm Protégé Partners, chose five funds that invest in hedge funds. Between them they held stakes in more than 200 hedge funds. The bet ran from 1 January 2008 to 31 December 2017. And fees, which such arguments usually leave vague, were written into the bet.

Buffett gave the result in his 2017 letter to the shareholders of his company, Berkshire Hathaway. Over the ten years the index fund grew 125.8%, or 8.5% a year on average. The five funds grew 21.7%, 42.3%, 87.7%, 2.8% and 27.0% in total, and one of them was closed in 2017. The prize was $1 million for a charity named by the winner. In 2012 the money was moved from US Treasury bonds into Berkshire shares, and it grew further. Girls Inc. of Omaha, the charity Buffett had chosen, received $2,222,279.

The clear terms did not help Buffett win. But they meant nobody could argue with the result. The measure, the period and the way fees were counted were fixed in advance. So neither side could read the result in its own favour.

In a Business Case Weekly case

The first decision in the prediction markets case is set in Iowa City in 1988. That year three economists at the University of Iowa started the Iowa Political Stock Market. Its 192 traders predicted George H. W. Bush's share of the vote to within 0.2 percentage points. The case asks whether you would put $10,000 into prediction markets as a business.

"Prediction markets as a business" is a topic, not a decision. To turn it into a decision you could be held to, answer four questions. Which company do you fund? Which regulator oversees it? Which step by that regulator, such as a licence or a penalty, do you need to see, and by when? What return, over how many years, would make the money worth it? The case is a good place to practise. A prediction market faces the same test with every contract it lists. Before anyone can trade, the contract must say where the answer will come from and by what date.

In your answer

"The decision is whether [who] will [do what] by [date]. It does not cover …"
"Success means [number] on [date], as shown in [named report]."
"Someone who knew every fact could settle this by checking …"
"Two really different options fit this question: … and …"

Common misuse

The hardest mistake to spot is being exact about the wrong thing. "Will we reach 40,000 downloads by March?" passes the test: the clairvoyant could answer it. But the answer tells you nothing about whether the business works. A quick check: say what you would do if the answer were yes, and what you would do if it were no. If you would do the same thing either way, the sentence is exact but useless, and the real decision is still missing.

References

Ronald A. Howard, "Decision Analysis: Practice and Promise", Management Science 34(6), 679–695, 1988. The paper that sets out the clarity test. Short enough to read in one sitting.
"Clarity test", Wikipedia. A one-page summary, with Howard's description of the clairvoyant and its sources.
Warren Buffett, "2017 shareholder letter", Berkshire Hathaway, pages 11–12. The full terms of the ten-year bet and the final results.
Ronald A. Howard, "Speaking of Decisions: Precise Decision Language", Decision Analysis 1(2), 71–78, 2004. The record and summary of the paper; the full text is behind a paywall.

Clarity test