Why are decisions important?

Decision making is the act of making up our mind about something, leading to the selection of a course of action or an opinion.  There has to be an objective and two or more ways of satisfying the objective.

If you’re reading this page, there’s a good chance that either you are making hard decisions, or you expect to be.  The difficulty with decision making is knowing a good decision from a bad one.  The outcomes of the decision feel disconnected from the decision itself.  You can spend a great deal of time and effort to make the perfect decision and get the worst possible result, likewise you can make a very poor decision like investing all of your pension fund on a horse race and walk away as a millionaire.  Consequently, there is often a lack of impetus to change our decision making ways.

Our lives and the lives of our businesses can be seen as a series of decisions.  Each decision builds on the previous decisions, opening some opportunities and closing other opportunities potentially forever. Right decisions usually conclude an issue, but wrong decisions call for more and more decisions in order to rectify the mistake of the initial decision.  Improving our decision making might not pay significant rewards for any individual decision, but over time it will result in a significantly improved situation for our companies and our careers.  Making a good decision does not necessarily lead to a good outcome, there are often influences that are uncertain at the time of making the decision, but poor decision making usually guarantees a bad outcome. 

Decisions are a responsibility.  We should face them the same as any other responsibilities, because right decisions relieve us of many problems whereas wrong decisions only compound our problems.  When a problem or decision presents itself, we need to make the best decision possible.  Sometimes we need to make a split-second decision, but more often we have time to consider our options.  If we get a clear insight into what we want to achieve, what our values and objectives are, then our decisions will come easier than when we have no idea of what we want to do or where we want to go.

Many decisions we make are based on our knowledge and experience, as well as our nature.  If we have no knowledge or experience we need to seek out someone who has and get their expert advice.  The higher we rise in our company or societal hierarchy the more
critical our decisions become, because they often affect the lives of many others. 

Why analyse decisions?

If you have ever faced a difficult decision that caused you sleepless nights, the problems associated with making hard decisions will be all too familiar to you.  Both business professionals and psychologists have observed common flaws in the way people make decisions.  Psychologist Daniel Kahneman received the Nobel Prize for his studies on how biases strongly and systematically affect intuitive decisions.  He concluded that we use unconscious shortcuts, termed heuristics, to cope with complex decisions.  “In general, these heuristics are useful, but sometimes they lead to severe and systematic errors”.

Recognizing these common problems helps us to understand what decision analysis can do for us:

1. Poor framing: stating the exact same decision alternative in positive or negative terms can significantly impact the attractiveness of the alternative.

2. Recency effects: decision makers frequently make decisions based on the information they have seen most recently.

3. Primacy effects: once a frame of reference for analyzing an issue develops, decision makers often find it difficult to move from that position.

4. Probability estimation: decision makers tend to overestimate the probability of events that are familiar or dramatic, and greatly underestimate negative events.

5. Overconfidence: decision makers tend to be overconfident about the accuracy of what they know.

6. Sunk costs: decision makers find it difficult to abandon courses of action that have already been adopted.

7. Association bias: decision makers try to repeat past successes by choosing strategies more related to a past situation than the current one.

What is decision analysis?

Decision analysis is a mature mixture of art and science.  At its heart, decision analysis is a toolbox of skills and tools that help you explore and later explain decision problems that you face.

The reasons for performing a formal decision analysis on a complex problem include:

1. Psychological comfort: it allows you sleep well at night knowing that you have explored the decision fully.

2. Communication: it explains the reasoning behind your decision, allowing others to contribute their alternate views.

3. Advocacy: it justifies the reasonableness of the proposed action or opinion.

4. Record: it documents why a particular alternative was chosen and what information was uncertain at the time of the decision.

After conducting a decision analysis, you should be able to answer such questions as:

1. What triggered the problem that led to the decision?

2. What criteria are being used to compare the alternatives?

3. What are the uncertainties relating to this decision?

4. What are the risk profiles of each of the alternatives?

5. How does our risk tolerance affect the alternatives?

6. What is the expected value of the preferred alternative?

7. How sensitive is the preferred alternative to changes in the variables?

Decision analysis is an iterative process, often requiring many loops through the process as you gain greater and greater insight into the decision.  

Prescriptive decision analysis translates the structured representation of a decision and its corresponding recommendation into insight for the decision maker and other stakeholders.  Decision analysis does not replace using your intuition; it simply gives it a structure and combines it with insight into the decision to guide you towards the best course of action.

Which decisions should I analyse?

Selecting the best decision alternative in a consistent manner becomes particularly difficult where the risks involved are high and the experience for that type of decision is low.  A structured approach to decision making helps us to make better decisions, reduce the risks and institutionalize an objective approach that makes the best use of the available information and experience.

One problem is that we make many of our decisions without even realizing that they are in fact decisions.  When you selected your current job, did you think of it as a decision with objectives to find the best position for you, or as a task to find a suitable position that met some minimum criteria?  Harvard Business School did a study on the financial status of its students 10 years after graduation and found that:

1.  27 percent of them needed financial assistance. ·        

2. 60 percent of them were living paycheck to paycheck.

3. 10 percent of them were living comfortably.

4. 3 percent of them were financially independent.

The study also looked at defining objectives and found these correlations:

1. The 27 percent that needed financial assistance had absolutely no objective defining processes in their lives.

2. The 60 percent that were living pay check to pay check had basic minimum criteria (such as managing to live pay check to pay check).

3. The 10 percent that were living comfortably had general objectives. They thought they knew where they were going to be in the next five years.

4. The 3 percent that were financially independent had written out their objectives and the steps required to reach them.

 Systematically appraising how well we are doing in terms of our values often suggests fruitful decision opportunities to pursue.  However prescriptive decision analysis is not required for all decisions, a requisite decision means that we spend just the amount of time, money and effort that the decision warrants.  Prescriptive decision analysis works best when:

1. The risk exposure is high, or

2. The impact of the decision is very large relative to the effort required for a decision analysis, or

3. There is no prior experience or data available to guide the decision.

What is a good decision?

A good decision is a logical one based on the available information and reflecting the preferences of the decision maker.  Good decisions that result in bad outcomes should thus not be cause for guilt or recrimination.  If a decision is made on the best information available at the time of the decision, then the quality of the decision stands irrespective of the outcome.

We all know how hard decision making can be.  One thing we can be sure of, business decisions are with us from the day we start working to the day we retire.  So, let us be equipped as best we can.  Decision analysis software defines a structure that allows us break out the components of our decisions and examine them individually before combining them to identify the best alternative.
  

How do I analyse a decision?

The following examples walk step by step through the analysis of some common decisions we can all relate to.  Decision analysis requires time and effort, but when you consider the cost of making a bad decision, the time and effort becomes clearly worthwhile.  Decision templates available for many common decisions are an excellent starting point.

1). Moving House John and Mary are expecting their second child but they don't have enough bedrooms.
2). Court Case Joanne is suing an insurance company after being involved in a serious traffic accident.