MAKING SMART CHOICES How to think about your whole decision problem John S. Hammond, Ralph L. Keeney, Howard Raiffa (1999), Smart Choices, Harvard Business School Press

Eight keys to effective decision making Work on the right decision problem Specify your objectives Create imaginative alternatives Understand the consequences Grapple with your tradeoffs Clarify your uncertainties Think hard about your risk tolerance Consider linked decisions

PROBLEM: How to define your decision problem to solve the right problem Be creative about your problem definition Turn problems into opportunities Define the decision problem  What triggered this decision? Why am I considering it?  Question the constraints the problem statement.  Understand what other decisions impinge or hinge on this decision.  Establish a workable scope for your problem definition.  Ask others how they see the see the situation – for fresh insights. Reexamine problem definition as you proceed Maintain your perspective

OBJECTIVES: How to clarify what you are really trying to achieve with your decision Let your objectives be your guide Watch out for pitfalls – narrow focus; insufficient time spent Master the art of identifying objectives  Write down all concerns you want to address  Convert concerns into succinct objectives  Separate ends from means to establish fundamental objectives – Why? Why? Why? Why? Why?  Clarify what you mean by each objective  Test objectives to see if they capture your interests

OBJECTIVES: How to clarify what you are really trying to achieve with your decision (continued) Practical advice for nailing down objectives  Objectives are personal  Different objectives suit different problems  Objectives should not be limited to availability or ease of use of data  Fundamental objectives for similar problems should remain relatively stable over time

ALTERNATIVES: How to make smarter choices by creating better alternatives Don’t box yourself in with limited alternatives The keys to generating between alternatives  Use objectives – ask “how?  Challenge constraints  Set high aspirations  Do your own thinking first  Learn from experience  Ask others for suggestions  Give your subconscious time to operate  Create alternatives first; evaluate them later  Never stop looking for alternatives

ALTERNATIVES: How to make smarter choices by creating better alternatives (continued) Tailor your alternatives to your problem  Process alternatives – Ben Franklin Example  Win-win alternatives  Information gathering alternatives  Time-buying alternatives Know when to quit looking

CONSEQUENCES: How to describe how well each alternative meets your objectives Describe consequences with appropriate accuracy  Completeness and precision Build a consequences table  Mentally put yourself in the future  Create a free-form description of each alternative’s consequences  Eliminate any clearly inferior alternatives  Organize descriptions of remaining alternatives into a consequences table Compare alternatives using a consequences table

CONSEQUENCES TABLE --

CONSEQUENCES: How to describe how well each alternative meets your objectives (continued) Master the art of describing consequences  Try before you buy  Use common scales to describe  Don’t rely on hard data  Make the most of available information  Use experts wisely  Choose sales that reflect an appropriate level of precision  Address major uncertainty head on

TRADEOFFS: How to make tough compromises when you can’t achieve all of your objectives Find and eliminate dominated alternatives Make tradeoffs using even-swaps -- the even swap method  Determine the change necessary to cancel our an objective  Assess what change in another objective would compensate for the needed change  Make the even swap  Cancel out the now irrelevant objective  Eliminate the dominated alternative

EVEN SWAP EXAMPLE --

Alt A dominates Alt E

EVEN SWAP EXAMPLE -- Alt D practically dominates Alt C – swap salary increase to $2000 w/ drop in working condition from Excellent to Good

EVEN SWAP EXAMPLE -- Now D dominates C And D also dominates B

EVEN SWAP EXAMPLE For Alternative A do the following even swaps:  Working conditions form Poor to Good; Salary from $2500 to $2400

EVEN SWAP EXAMPLE For Alternative A do the following even swaps:  Experience from Great to Good; Travel Time from 45 to 30

EVEN SWAP EXAMPLE For Alternative A do the following even swaps:  Salary from $2400 to 2000; Free time from Little to Flexible Now D dominates A so select D!

TRADEOFFS: How to make tough compromises when you can’t achieve all of your objectives (continued) Practical dominance  one alternative dominates another except for a minor difference – e.g. $25 salary Practical advice for making even swaps  Make the easier swaps first  Concentrate on the amount of the swap – not on the perceived importance of the objective  Value an incremental change based on what you start with  Make consistent swaps  Seek out information to make informed swaps

UNCERTAINTY: How to think about and act on uncertainties affecting your decision Distinguish smart choices from good consequences  A smart choice, a bad consequence  A poor choice, a good consequence Use risk profiles to simplify decisions involving uncertainty How to construct a risk profile  Identify key uncertainties  Define outcomes  Assign changes  Use judgment – consult existing information – collect new data – ask experts – break uncertainties into their components  Clarify the consequences Picture risk profiles with decision trees

RISK TOLERANCE: How to account for your appetite for risk Understand your willingness to take risks Incorporate your risk tolerance into your decisions Quantify risk tolerance with desirability scoring  Desirability means “utility” Assign desirability scores to all consequences Calculate each consequence’s contribution to the overall desirability of the alternative Calculate each alternative's overall desirability score Compare and choose

RISK TOLERANCE: How to account for your appetite for risk (continued) Avoid pitfalls  Over focus on the negative  Fudging probabilities to account for risk  Ignoring significant uncertainty  Foolish optimism  Avoiding risky decisions because they are complex  Subordinates who do not reflect your organization’s risk tolerance in their decisions Open up new opportunities for managing risk  Share the risk  Seek risk reducing information  Diversify the risk  Hedge the risk  Insure against the risk

LINKED DECISIONS: How to plan ahead by effectively coordinating current and future decisions Linked decisions are complex Make smart linked decisions by planning ahead Follow six steps to analyze linked decisions  Understand the basic decision problem  Identify ways to reduce critical uncertainties  Identify future decisions linked to the basic decision  Understand the relationships in linked decisions  Decide on what to do in the basic decision  Treat later decisions as new decision problems Keep all your options open with flexible plans  All-weather plans  Short-cycle plans  Option wideners  “Be prepared” plans

PSYCHOLOGICAL TRAPS: How to avoid some of the tricks your mind can play on you when you are deciding Neglecting relevant information: the anchoring trap  Population of Turkey example (35MM vs 100MM anchor) The status quo trap  Chocolate bar vs. mug gift example Sunk cost trap  Car repair example after accident Seeing what you want to see: the confirming evidence trap

PSYCHOLOGICAL TRAPS: How to avoid some of the tricks your mind can play on you when you are deciding Posing the wrong question: the framing trap  Framing gains vs losses  3 200M per ship example  Risk averse re: gains; risk seeking re: losses Slanting probabilities and estimates: the prudence trap Seeing patterns where none exist: the outguessing randomness trap Going mystical about incidences: the surprised-by- surprises trap