HUMBLE DECISIONS FOR UNCERTAIN TIMES FMI PD WORKSHOP Hana Carbert, CMA, FCMA

Decisions, decisions

What decisions do you make?  Past decisions  Future decisions  Business or personal  Successful or not

Agenda 1. Decision context  Decision process  Environment & uncertainty  Human factors 2.Adapting for uncertainty & risk 3.Managing risks

Decision Process: this?

Decision Process: or this?

Decision 1:

Decision 2:

Problem-Solving Steps  Recognize Problem  Define Alternative Courses  Evaluate Alternatives and Decide  Implement Decision and Monitor  What is the problem with this?  Anything missing?  What is assumed?

The rational model  “Evidence-based decision making”  Good – if we have the right evidence and know how to use it  Assumes decision maker wants to be rational  Assumes clear/single criteria  Assumes relative certainty of outcomes

BUT…  Clear goal?  Clear decision criteria?

List goals and criteria for your decisions Exercise

Types of Decisions Programmed  Experience  Routine  Information  Decision-rules exist Non-programmed  Poorly defined  Unique situation  Often combined with lack of information and uncertainty or risk

Categorize your decisions: programmed or not? Exercise

Agenda 1. Decision context  Decision process  Environment & uncertainty  Human factors 2.Adapting for uncertainty & risk 3.Managing 4.risks

What causes uncertainty?

Environment of uncertainty  Risk regarding decision environment  Economic risk: e.g. growth, commodity prices, deflation/inflation; interest rates  Leadership direction  Weather & Nature  Technology  Human behaviour  Lack of information or poor information  Validity of assumptions  Ambiguity of goals and criteria

List uncertainties related to the decisions Exercise

Four ways of knowing  We know what we know  We know what we don’t know  We don’t know what we know  We don’t know what we don’t know

What are the (known) unknowns of the decisions? Exercise

Agenda 1. Decision context  Decision process  Environment & uncertainty  Human factors 2.Adapting for uncertainty & risk 3.Managing risks

Critical thinking  What forms our assumptions and experience?

Discussion  How can you reduce ‘what you do not know’?

Reducing what we don’t know  Edward de Bono: Six Thinking Hats  Defined but separate focus of team members  Diverse teams: backgrounds, training, types  Critical thinking: questioning assumptions, explicit reasoning  Culture  People awareness

How does your mind work?  How do you gather information?  Sensing vs. Intuitive  How do you evaluate information and make decisions?  Thinking vs. Feeling

Information Processing  What is YOUR Cognitive Style (Jung/Slocum)? Sensing Thinker Intuitive Thinker Sensing Feeler Intuitive Feeler

Information Gathering - Sensing  Like routine problems?  Collect hard facts?  Like detail?  Break information into components?  Like to work all the way through to make a decision?  See the world as a series of parts?

Information Gathering - Intuitive  Dislike routine?  Don’t like taking time for precision?  Tend to continually redefine the problem?  Consider alternatives simultaneously?  Jump around the steps of decision-making?  See the world as one big ‘whole’

Evaluation - Thinking  Structure the problem  Base decisions on logic and analysis  Unemotional, objective

Evaluating - Feeling  Make decisions based on personal conditions  Treat every decision as unique  Consider others responses in depth  Desire to accommodate others  Dislike difficult/unpleasant decisions

Discussion:  Relate Jung’s/Slocum’s framework to decisions made  Do you recognize people you know?  What does new insight suggest for future approaches?

Agenda 1. Decision context  Decision process  Environment & uncertainty  Human factors 2.Adapting for uncertainty & risk 1.Adapt process steps 2.Select decision model 3.Communicate goals, criteria and risks 3.Managing risks

How does this Doctor decide?

Humble decisions (Etzioni)  Focused trial and error  Tentativeness  Procrastination  Decision-staggering

More humble decision tactics..  Fractionalization  Hedging bets  Maintaining reserves  Reversible decisions

Reversible decisions  Final sale?

List ways the humble tactics could have been used Exercise

BUT…..  Clear objective/goal?  Clear decision-criteria?

Agenda 1. Decision context  Decision process  Environment & uncertainty  Human factors 2.Adapting for uncertainty & risk 1.Adapt process steps 2.Be aware of decision model 3.Communicate goals, criteria and risks 3.Reducing risks

Decision Models (Harrison)  Rational  Organizational  Political  Process

Rational Model  Seeks perfection/optimization - a decision- making prescription  Requires (almost perfect) information  Requires clear decision objectives/criteria - shared by all  Uses MS tools such as decision-trees, CPM, etc.  Problems?

Rational model  “Illusion of precision”

Organizational Model  Challenges assumption of perfect information  Recognizes limitations of decision-makers  Seeks rational, rather than perfect, decisions  Quick, satisfactory decisions

Political Model  Recognizes a variety of goals, agendas  Organizational power is the key driver impacting decisions

Process Model  Focus on the process, as opposed to end objective  Interdependence of steps: process will impact exhaustiveness of choices  Objective-oriented outcome, long-term focus  Recognizes behavioural impacts  Open to external environment

Which decision model applied? How did it affect the decision? Exercise

Agenda 1. Decision context  Decision process  Environment & uncertainty  Human factors 2.Adapting for uncertainty & risk 1.Adapt process steps 2.Be aware of decision model 3.Communicate goals, criteria and risks 3.Reducing risks

More than one goal

Decision Matrix - example Criteria Alternative AAlternative BAlternative C Financial outcome $ XXX $ XXXX Service Reliability Community Acceptance Environmental Risk Timeliness of completion

Decision Matrix – Example + CriteriaA1- worstA2 – most likely A3 - best Financial outcome $ XXXX $ XXX Service Reliability Community Acceptance Environmental Risk Timeliness of completion

Decisions with uncertainty  Communicate range of outcomes  Communicate sensitivities  Communicate at what point does the preferred decision changes  Outcomes  Criteria changes  Decision process changes

Decisions with uncertainty  Segment decision elements  Identify points of no return  Revisit decision through implementation  Communicate and manage risks

When is the decision point?

Show variability

Was range of outcomes understood? If not, how could it have been communicated? Exercise

Agenda 1. Decision context  Decision process  Environment & uncertainty  Human factors 2.Adapting for uncertainty & risk 1.Adapt process steps 2.Be aware of decision model 3.Communicate goals, criteria and risks 3.Managing risks

To quote a genius...  “Anyone who has never made a mistake has never tried anything new” Albert Einstein

Anticipate and plan for risks  Good judgment comes from experience, experience comes from bad judgment Author unknown

Communicate: Risk Register CategoryRiskLikelihoodImpactResponse

Types of Risk  Strategic – choice of strategies  Operational – risk to assets & ability to execute strategy  Compliance – people/organizations will not do what they are supposed to do  Reporting – reliability and accuracy of information  Categorization helps the identification process: checklist

Risk Management Process  Anticipate – what can happen?  Assess – what would be consequences?  Plan – how can we respond?  Control - is the process working?

Risk Management Responses  Accept  E.g. delays due to weather  Share or Transfer  E.g. P3’s transfer risk of cost overruns  Reduce or Mitigate  E.g. response plans to accidents/disasters  Avoid  E.g. don’t engage in conflict

List risks related to the decisions. How could they be managed? Exercise

Too much agreement?

Role of Communication  Communication skills and style can enhance of encumber group decision-making  Culture can enhance or encumber  Clear goals and criteria will enhance decision- making

Agenda 1. Decision context  Decision process  Environment & uncertainty  Human factors 2.Adapting for uncertainty & risk 3.Managing risks 4.Conclusion

Role of financial managers  You can improve the effectiveness of decision making:  Defining and providing relevant information  Clarifying goals, criteria  Providing balanced evaluations  Communicating associated risks  Applying decision process skills  Managing risks

How can you use this?

Questions? THANK YOU!