Advanced Decision Making

The Eight Elements of Decisions Problem Objectives Alternatives Consequences Tradeoffs Uncertainty Risk Tolerance Linked Decisions

Problem Be creative about your problem definition Turn problems into opportunities Reexamine your problem definition as you go Maintain your perspective

Let your objectives be your guide Objectives determine what information you seek. Objectives can help you explain your choices to others. Master the art of identifying objectives

Alternatives Don’t box yourself in with limited alternatives Use your objectives and ask “how?” Set high aspirations Ask experts for suggestions Give your subconscious time to operate Incubate Never stop looking for alternatives Think outside the box, brainstorm

Consequences Use top management experts to help define political, financial and public-relations consequences.

Tradeoffs Use swaps Determining the relative value of different consequences is the hard part Compare alternatives using a payoff matrix

The Prisoner’s Dilemma In 1950 a conductor on a train to Kiev rehearses for a Tchaikovsky concert. KGB arrests him for subversive activity. KGB arrests Boris Tchaikovsky, a worker, on the streets of Kiev. KGB puts them in separate cells so they cant communicate. KGB offers them both a deal. 4

Game Theory You have to take into consideration the objectives and strategies of the other players. Not just the probabilities Not just your own goals and strategies Your moves depend on the other side’s moves.

The Prisoner’s Dilemma If the conductor rats and Boris doesn’t, he gets one year in a gulag and Boris gets 25 years. If the conductor doesn’t rat and Boris does, he gets 25 years in a gulag and Boris gets one year. If both rat, each gets 10 years. If neither rats, each get three years. The silent auction begins. 5

Each serving 10 years, they meet in the gulag, begin talking and discover they ratted on each other. While talking they realize that if each had said nothing, they would only have been in for three years. 6

Payoff Matrix Boris Rat Not Rat Rat 10, 10 * 1, 25 Conductor 3, 3 25, 1 Not Rat * Conductor, Boris 7

Looking at the Payoff Matrix, the lower right-hand box (3,3) is clearly the most favorable payoff – three years for each. Thus, staying silent is the best option for the conductor and Boris. A Payoff Matrix is a good way to visualize options, but coming up with values is the hard part. A four-box matrix (2X2) covers two players, if there are three players, you need a nine-box (3X3) matrix, etc. With multiple players, it gets really complicated but not impossible. You can use a payoff matrix with a binary (go, no go) decisions – two players – and up to four possible outcomes like in the Prisoner’s Dilemma.

Uncertainty Use risk profiles to simplify decisions involving uncertainty What are the key uncertainties? What are the possible outcomes of these uncertainties? What are the chances of occurrence of each possible outcome? What are the consequences of each outcome? Use experts to help define possible outcomes

Uncertainty Use a Decision Tree A decision tree helps you visualize the consequences of your binary (go, no go) moves versus the binary moves of a single competitor.

Decision tree A = You B = competitor B Go A Go B No Go A B Go A No Go

Risk Tolerance Understand and calibrate your group’s tolerance to take risks Incorporate your risk tolerance into all of your decisions

Linked Decisions Linked decisions are complex Ask: “How will this decision affect other people, other departments, other divisions, partners, your community (industry, country or world)?”

Decision Making Summary Problem Objectives Alternatives Consequences Tradeoffs Uncertainty Risk Tolerance Linked Decisions

Seven Basic Rules Make bold decisions that challenge the status quo Avoid choices that justify past bad decisions Check for faulty cause-and-effect reasoning Test your decisions with experiments (shoot little bullets, not big cannonballs) Root out unconscious prejudices Foster and address constructive criticism Defeat indecisiveness with clear accountability