Yes, Even You Can Make Smart Decisions

Last post, I told you about the Harvard Business Review (HBR) article written by Hugh Courtney, Dan Lovallo, and Carmina Clarke. You will find “Deciding How to Decide” on page 63 of the November 2013 issue. According to the authors,  “Senior Managers are paid to make tough decisions.” What about smart decisions?

Dan Lovallo is a co-author of some of the earlier HBR posts I’ve featured. You can read them here, and here. With the right subscription, you can read the current article, “Deciding how to Decide“ here. This is the second part of a two-part discussion of the article. In this part, I’ll follow the authors into the guts of making smart decisions. Part Three, up next time, will deal with “Complicating Factors” of smart decisions.

Decision Profile for Smart Decisions

I covered the Decision Profile in my last post. To summarize, you must decide whether you know what it will take to succeed, and whether you can predict the range of possible outcomes. Otherwise, no smart decisions will be forthcoming.

Situation 1 – Robust Causal model and Certain Outcomes

If you have both of these decisions in hand, especially the latter with great certainty, then you can apply the familiar decision capital-budgeting tools that use discounted cash flow, and internal rate of return. OK, business as usual!

Situation 2 – Robust Causal Model and Range of Outcomes

So the causal model is still working for you, but you have less certainty on the outcomes? OK, you are still in good shape.If you can predict a range of possible outcomes and predict them with probabilities of attainment, you can still use the standard tool set of situation 1. The authors recommend that

Quantitative multiple-scenario tools such as Monte Carlo simulations, decision analysis, and real options valuation

will do the trick. Statistical approaches and standard analysis tools, used together, will get you where you want to be. Whew… still making smart decisions!

Situation 3 – Robust Causal Model but Unable to Predict Outcomes

So the authors ask what happens if you enter a market for the first time? Perhaps with a new and different market you really can’t predict outcomes in ranges, or with certainty. Should you give up?

NO! The authors suggest qualitative scenario analysis and case-based decision analysis. All ready for that? I didn’t think so. Well, one application of these techniques is to build a “supply side analysis” of how your customers might behave across a range of possible outcomes, and consider how your competitors might behave in response. Another is to use case-based decision analysis of similar business situations. What is case-based decision analysis?

These tools provide a systematic approach to aggregating and synthesizing information from analogous past experiences and examples. In general, analogies that are most similar to the decision at hand are given more weight in determining the best choice.”

OK, got that? Find similar situations and abstract to the current situation in an organized way. Well, that’s not so hard, is it?

 Situation 4 – Weak/Absent Causal Model but Outcomes are Predictable

You say you don’t know how the car’s engine works, but you can predict what will happen if you run out of gas? OK, this scenario is not so foreign as it might first seem.It is not that difficult to define a range of outcomes, from complete success to abject failure, even if you don’t understand the business model that underlies those outcomes. What to do? Use the same case-based reasoning mentioned in Situation 3. According to the authors, the secret sauce of an organization’s business model may be hard to distill, but the possible outcomes are not.

Situation 5 – Weak/Absent Causal Model and Outcome Prediction

Jeez, what do you know… what day it is? OK, relax. All is still not lost.You are back to case-based decision models. If you can find some analogous situations to the one you are analyzing, you will be in good shape. Abstract from them, develop your model, and analyze. Not perfect? No, it isn’t the best situation, but it is common enough.

The Bottom Line

Let’s face it… the more you know, the easier the analysis task becomes. As insight into mechanism and resultant outcomes fade, so does the certainty with which you can make decisions. However, we all face the decision-making process in an environment of uncertainty. The HBR article does show you a way forward, just when the situation seems most obscure. Want to discuss decision-making, or something else? Contact us, and let’s get the conversation started.