We are not magic elves!
We all make decisions and in almost all cases we feel uncertain about what the right decision is. We worry about if we understand the situation correctly, if know enough, if we have considered the right alternatives, what the risk are, and so on, and on, and on. This is ok! We are not clairvoyant magic elves. However, science has produced significant insights regarding our abilities to make good decisions and also our limitations but these findings have not been spread widely enough according to me. We need to get realistic about what a decision means in practice and not keep hoping for magic elves to appear.
Three kinds of decisions
There are three kinds of decisions. There are decisions under certainty, which are rare in business situations but can be routine decisions where we know what the outcome will be. Then there are decisions under risk where we know the probabilities associated with outcomes like the probability that our new technology will deliver the right function for the customer. Finally, there are decisions under uncertainty which means that we do not know the probabilities associated with outcomes. We just need to guess and keep an eye on the progressing situation and make corrective actions to get where we want to go.
Decisions under risk
If we focus on decisions under risk, what is risk really? There are many myths about risk that simply is not true. One is that risk assessments should be based only on scientific facts. This is not the case but we need to be innovative in our approaches to assessing risk and use scientific facts to support the process. Risk does not have a single well defined meaning since each person perceives risk in different ways. However, in business and decision analysis the meaning of risk is often the one described in the previous section. One other thing to keep in mind is our inability to reason about probabilities. We just cannot do it without some help of at least a pen and a paper. If we try to just assess the probabilities in out head, we will fail over and over again. We need to do the math explicitly to get to the right answer.
If we are dealing with decisions under risk we have the opportunity to utilize deterministic and statistical analysis, often called decision analysis, to produce insights about the affecting factors, their impacts, and possible decision strategies in order to make a good decision. Decision analysis is not widely spread in industrial applications but there are some good examples like Chevron which uses decision analysis in many of their high investment decision processes.
Food for thought
- The question is how does your organization treat different decisions in relation to uncertainty, risk, or certainty?
- And, which approaches do you utilize accordingly?
/ Joachim Cronquist, Partner, co-author: Joakim Eriksson, Department of Product Realization (Mälardalen University)