decision making – 1stOutsource

Be more critical and critique what people say

To a large extent in the academic and business world things move forward by a thorough critique of the existing body of knowledge or by taking apart the position people take on a particular issue (usually in hindsight). Often very strong positions are held based on very shaky ground and expertise claimed based on little supporting evidence. I think it is always interesting when you look at a newspaper report or an article in the trade press one can always determine the authors own position vis a vis the issue being discussed as well as the position they take in the field of knowledge they are advancing.

What we need to do when we look at a report being presented to us at work, or even on the nightly television bulletin, is to learn how to evaluate what people say and weigh the truth and merit of the argument they are proposing.

When we listen to these arguments try to assess:

What are the assumptions being mobilised by the author from her own perspective to support the case and what approach is being taken in the construction of the argument as far as evidence is concerned.
What is the purpose of the review or report – what is it for and for whom is it written?
What is being included or excluded from the author under scrutiny in terms of the body of knowledge and alternative views?
How are countervailing views dealt with and what form of words is being used to describe them – dismissive, pejorative or supportive?
How gaps in our understanding of the issue are explained – or are they glossed over and simplified in order to trivialise opposition?
What is the actual or implied call to action – what is it the writer wishes you to buy or accept that forms the core of the message?

I personally also ask – so what have you brought to the party, what contribution have you added to my understanding of this topic?

The way to read a newspaper follows the same approach – it means we engage with the author and as a consequence perhaps we will learn something. Remember we should not accept any assertions, claims, or recourses to expertise from any authors of these papers or articles unless they demonstrate their expertise with erudite argument. We need to look at all of them with a skeptical eye and try to get behind the purpose of the message and how it is aimed to persuade and orient opinion in a certain way and in business to ensure the ‘right’ decision is made.

Royston

The Ten Commandments in Risk Reduction

decision making / By Royston Morgan

Risk reduction in decision making comes down to two main considerations:

Increasing our knowledge of the problem by such techniques as soft systems engineering, SODA or any of the many tools that enable us to gain a foothold on the nature of the issue and dealing with the uncertainly of the risk. Here is a simple approach that puts some rigour in our thinking when it comes to breaking down a complex problem and deciding what to do next.

There are Ten Commandments in risk reduction (Morgan & Henrion 1990)

Do your homework
Problem drives the analysis
Make analysis simple (but not too simple)
Identify all relevant assumptions (and write them down)
Be explicit in your decision making criteria (and write them down)
Be explicit in the uncertainties (and the unknown unknowns thanks to rumsfelt)
Do sensitivity and uncertainty analysis
Iteratively refine the problem statement and the analysis
Document clearly and completely…
… And expose your work to peer review

If analysis can be understood it becomes more acceptable and people will buy in and have more faith in the outcome – but be careful and do not make the work over complex and avoid over simplifications as well. Both stop people making an informed decision based on what evidence you have. Also as seen above document what you do during the process that way when it goes wrong (as it often does) we can learn and move forward and get it right next time – it is particularly important to set down assumptions and what you think are ‘givens’ – these are the points that we most often get wrong.

Shark week on Discovery Channel Begins on 2nd August

decision making / By Royston Morgan

Apparently when the Discovery Channel broadcasts ‘Shark Week’ which this year starts on August the 2nd visits to Florida beaches decline dramatically. Presumably, the Discovery’s programming makes the waters no less safe (I hope). However, after watching a week of kicking legs seen from a shark’s eye perspective from below, the idea of shark attack is refreshed in our minds and we choose not to offer ourselves as bait. This phenomenon is known in decision-making as the availability heuristic or bias – a heuristic is a rule-of-thumb we apply in situations of uncertainty. What is happening is we assume that events that are easily recalled due to recency (i.e. happened last week) or that are particularly dramatic (i.e. being eaten) are more likely to occur than they otherwise do in practice. Although there is always a chance I suppose as Florida is the shark attack capital of the world and overall the USA has more shark attacks than any other country in the world due to the large amount of sharks per se, as well as being the home of the worlds three most dangerous species of shark: the Bull, Tiger and Great White as well as the culture of surfing and water sports around its shores which puts lots of opportunity their way! Although you will be glad to hear that although shark attacks are more common in the US there are fewer fatalities than in Australia – presumably the yanks can take their foot in their hand and get the hell out of the water more quickly!

The sunnier side of the availability heuristic is the lottery and the question should you invest $2 a day in the bank (pre credit crunch) or use it to buy a lottery ticket hopefully win and move down to Florida and go shark hunting? Math makes the decision obvious I am afraid.

Suppose you invest two dollars every day (roughly $62 a month) at a reasonable rate of 10% per annum then you will take almost exactly 50 years to accumulate close to $1m (actually about $920,000 but close enough) – so start saving now! To earn this same $1m in a big lottery like the National Lottery in the UK, you would have to match five numbers and a bonus ball; at odds of 2,330,635-to-1 in any one game I am told. So if you spend two dollars a day for 50 years you could enter 36,500 tickets and would have 1-in-63 chance of making those million dollars. This probability of 1:63 means the expected value from the investment over the 50 years is around $16,000 – against the expected vale of $1M dollars from the investment choice – no brainer isn’t it.

However the concept of availability and the recency effect image of immediate winners enjoying extreme wealth subvert this rationality. What the crafty lottery companies do is parade in front of us some Joe who has just won a fortune and the next time we call in for gas or food at the Quickie Mart we have the faint glow in our memory that someone has just won the lottery so assume it occurs much more frequently than it does and it is our turn next. Well someone has to win surely and why not me? So we buy that ticket again and again only to tear it up with the forelorn hope of winning next time.

Here is a pic for how not to go shark fishing – I think this was off South Africa during a military training exercise.

Why men cannot think straight in the presence of an attractive woman!

decision making / By Royston Morgan

I suppose many read the story the other week about research that showed men who spend even a few minutes in the company of a very attractive woman perform less well in cognitive tests designed to measure brain function. Apparently when men are intensely focused on an attractive female such is the extent that cognitive resources are used up that it is almost impossible to think of anything else – in this case one researcher could not remember his address when asked by a particularly impressively built young lady. The effect does not work the other way women I’m afraid – women are more focused on status and potential in a mate and on much more practical matters such as how much dosh she can squeeze out of the hapless jerk when they get to the divorce courts

This effect is well known in fact in the psychology self-regulation area. It is thought that the cognitive resources we have to apply to particular tasks are actually finite and get used up as we carry out tasks – particularly demanding thinking jobs at hand deplete these resources quickly. In this case the young man in question was intensely studying a potential mate and the brain power needed to do this zapped his thinking powers and blood rushed to the head and elsewhere and the thinking power simply was not available to carry out easy declarative tasks like giving her his phone number (yer dummy!). The findings have implications for the performance of men who flirt with women in the workplace or even better using attractive women in negotiating situations. When an attractive female manager is presenting the product plan and talking about market penetration there is a finite chance that her males colleagues are not thinking about marketing strategies at that moment and are thus unable to come to rational judgments about the approach. There we have it – at a stroke (forgive the pun) – the reason for the lack of seriousness given to female presenters is apparently down to innate and unalterable sexual drives due to the reproductive orientation of men when confronted with an attractive potential mate – and is not due to any socialisation process (oh no its not – this is more of your sexist claptrap ed.)

By way of balance I found this up to date picture on the functional MRI breakdown of the cognitive process in male human brain that goes a long way in explaining the key aspects of behaviour described above.

Royston

malebrain_functional_breakdown — The male brain

The Buriden’s Ass ‘method’ of decision making

decision making / By Royston Morgan

The Buriden’s Ass ‘method’ of decision making is used when two or more equally attractive alternatives exist and it is difficult to make a choice. It is of course based on the old fable of Buriden’s Ass, who starved to death because he was tethered halfway between two equally large and succulent piles of hay – he couldn’t make up his mind which one to walk over to and eat. The approach is really simple; if the outcome of a choice between two options in terms of benefit is equally attractive focus on the drawbacks or downside risk of choosing an option. Pick the option based on minimising the downside – I am not sure how this would have helped Buriden’s ass but let’s put that to one side.

Example

Your kindly old boss wants to increase your salary but in the credit crunch times he offers you these choices:

1. Take an increase in salary,
2. Go part time and work fewer days per week at the current annual salary,
3. Take a long paid sabbatical each year of six weeks and continue at the same annual salary.

In terms of economic value, each of the three choices comes out exactly the same.

Now drawbacks of:

1. Is that I still have to commute each day to the office in rain or snow whilst
2. Means I will have to cope on my current salary for another year and my wife might nag and
3. Although attractive means I will be out of circulation for a long time and may lose track of my grip on the business and my job.

I’d go for 2) as although I get no rise this year there is a good chance I could get one in the future and spend the money on the extra days off I would have in the bank.

Try one yourself:

You are offered a choice of new assignments
1) an ex patriot assignment in Holland for 2 years
2) a promotion to manager of the small department you currently work within and
3) a transfer to the head office in London doing the same job as now but with a higher salary.

All are economically equivalent which would you choose?

Be critical and think about what people are really saying

decision making / By Royston Morgan

Be more critical and critique what people say

To a large extent in the academic and business world things move forward by a thorough critique of the existing body of knowledge or by taking apart the
position people take on a particular issue (usually in hindsight). Often very strong positions are held based on very shaky ground and expertise claimed based on little supporting evidence. I think it is always interesting when you look at a newspaper report or an article in the trade press one can always determine the authors own position vis a vis the issue being discussed as well as the position they take in the field of knowledge they are advancing.

When we listen to these arguments try to assess:

What are the assumptions being mobilised by the author from her own perspective to support the case and what approach is being taken in the construction of the argument as far as evidence is concerned.
What is the purpose of the review or report – what is it for and for whom is it written?
What is being included or excluded from the author under scrutiny in terms of the body of knowledge and alternative views?
How are countervailing views dealt with and what form of words is being used to describe them – dismissive, pejorative or supportive?
How gaps in our understanding of the issue are explained – or are they glossed over and simplified in order to trivialise opposition?
What is the actual or implied call to action – what is it the writer wishes you to buy or accept that forms the core of the message?
I personally also ask – so what have you brought to the party, what contribution have you added to my understanding of this topic?

The way to read a newspaper follows the same approach – it means we engage with the author and as a consequence perhaps we will learn something. Remember we should not accept any assertions, claims, or recourses to expertise from any authors of these papers or articles unless they demonstrate their expertise with erudite argument. We need to look at all of them with a sceptical eye and try to get behind the purpose of the message and how it is aimed to persuade and orient opinion in a certain way and in business to ensure the ‘right’ decision is made.

People prefer cash back or a free gift to wild discounts

decision making / By Royston Morgan

What would you choose a rebate or a discount – five ways why a rebate works

In prospect theory, which a descriptive theory of how people choose under risk, how options are framed affects the choice a person will take. When alternatives are presented people prefer options posed as gains rather than as reduced losses. An example to illustrate what I mean is the case of a discount verses a rebate in a car purchase. A rebate cheque is valued much more by a consumer than a discount on the price even when the financial parameters are identical in value. So a rebate cheque of $2000 is valued more in the eyes of a consumer than a discount of $2000 on the retail price. So in these credit crunch times the rebate in Germany for scrapping your old car is right on target as far as generating extra demand is concerned – however whether this is just pulling forward sales we shall see.

The reason for this is in the way we consumers look at the options before us. When a discount is offered on a good that discount is integrated into the original purchase price – it is possible that this is something we all have learnt to do over time. Bombarded as we are by sales of sofas and other incidental goods that seem to be on constant 50% discount we no longer ‘see’ the original price and ascribe the discounted cost of the good as the reference price. Rebates on the other hand are disaggregated in our minds and processed separately from the purchase price. We interpret the rebate as a gain whilst the discount is seen as a reduced loss and when given a choice which has on the surface the same monetary value we chose the rebate.

This principle seems to apply also to gift items, free goods and other promotions, other things being equal we prefer to have the free items compared to an identical discount due to this process. One caveat here is that the premium must be valued – it is no use offering two for the price of one if the extra package of hot cross buns goes stale or the free item is just not interesting enough to excite interest like a tin of cat food when you do not have a cat! But a well thought through extra in a promotion can be seen as a nice gain for the consumer and can orient a choice in your direction. A lottery ticket is a example with the promise of huge gains that is seen by the consumer as highly attractive compared to the $1 discount price of the ticket. Think about how this also works by removing the choice of buying a lottery by the consumer and all those nasty rationalisations of having no chance of winning!

Another aspect of the way we make choices is the certainty effect – we prefer an option when the outcome is certain or known compared to the situation when there are probabilities at play. For example we prefer to accept an offer of $100 with 100% probability rather than an offer of $112 at a probability of 90% although the expected values are the same. This can be extended in some cases where the certain choice is materially much worse than the uncertain option.

Five aspects why promotions win over discounts

It is materially easy for the customer to visualise the gain and little mental processing is needed.
They value free promotions as they are seen as a gain rather than a reduced loss.
They integrate discounts into the price – the discounted price becomes the reference.
The separate the evaluation of promotions from prices.
They prefer the certainty of the gain (bird in hand syndrome).

So all in all offering a promotion in the form of a certain win for the customer works much more effectively than ever increasing (or continuous) discounts which are only serving to re-set the price points at ever lower levels.

What makes a good decision maker – the three ingredients

decision making / By roymoggadmin

What makes a good decision maker – the three ingredients

A 2004-2005 Teradata Report on Enterprise Decision-Making showed that over 70% of the respondents in their survey said that poor decision-making is a serious problem for their business. Other research in the UK conducted by the research agency YouGov for the Investors in People organization highlighted the negative impact that poor decision-making was having on employees. Other research in the area of organizational performance is consistent, with some suggesting that well over half of all decisions fail in some way. Specifically that the outcomes of the decision making process was poor – the ‘wrong’ decision had been taken or simply never implemented. It seems obvious that if decisions can fail for up to half of the time then organizations need to pay very close attention to the quality of their decisions and the people carrying out this role, but to-date, there is not much evidence that they are.

Decision-making is an age old problem that is being compounded today by increasing knowledge, population, complexity, speed and change. The number of decisions being made is increasing as is the pace of change and the number of people in an organization involved in the thousands of day-to-day decisions, from a new product launch to a decision on a new hire that have to be made. Decision-making is an essential requirement of management especially at the senior level and is perhaps the true core competence of leaders … ‘our society has largely neglected the fact that sound judgment and decision making are the crux of many professions’ (Smith et al 2004). The very best leaders appear able to make crucial decisions effortlessly ‘standing on their feet’ drawing on unseen resources of domain knowledge and experience that set them apart from the crowd. How effective managers and staff are in general at making good decisions is a moot point and understanding the process of high performance decision making is becoming critical to organizational success.

Problem-solving and decision-making are closely linked as each requires creativity in identifying, developing then evaluating options from which a course of action needs to be chosen. A problem always denotes that there are options to be chosen from – if there is a known solution then this is a puzzle not a problem. A decision is basically a problem solving process under uncertainty, so the steps or stages of decision making are more or less the same as those for problem solving. There are many n-step problem solving routines to guide decision making but at the heart of the decision making problem are the following three main aspects: how the problem is seen, how alternatives are generated, and how the decision is actioned.

The three key aspects of high level decision making:

Proactive cognition is a feature of people who actively seek to change the environment and not passively react to it. People strong in this feature scan for opportunities in the world preferring to make choices rather than follow procedures and create novel options by seeing problems differently rather than considering just the obvious.
Deciding is about making the decision, weighing and chewing over the options and above all considering the risk of alternatives. People who are high in this ability often draw on extensive domain knowledge and experience enabling them to make mental short cuts and come to a decision apparently quickly hiding the deep processes really going on.
Finally Action Control – making and enacting the choice. The effective planning and scheduling of actions to deliver the decision are examples of behavior of people who are able to ensure that decisions are not postponed, procrastination is avoided and decisions are implemented without delay.

A good decision is the direct result of clear criteria, the scope of the choice to be made together with the risk of each alternative – then taking action. From this perspective a good decision is the outcome of a process of optimally achieving a given objective from a certain starting point. A good decision is a logical one (or at least defensible and traceable) based on the available knowledge to hand that answers a particular organizational problem. Measuring whether or not decision making is good or bad needs to assess both the process and the outcome, the effectiveness and the quality of the decision making, as these are two quite distinct things. Effectiveness is how well the process of decision making is managed and how learning takes place – what caused a poor outcome to occur is fed back into the process. Output quality is to some extent comes well after the decision has been taken and is a reflection whether the right choice was made as well as on how well the choice was placed into action and implemented. There are many examples, particularly in the political world, where there is an assumption that the decision is the same as the implementation. A good decision making process therefore integrates the choice with the implementation and looks at the outcome to ensure learning takes place.

It is this latter point that completes the circle – it is a balanced decision making process that seems to be about right. Consciously attending to all three areas of the decision making process is key. The seeking of ways to control and act on the world, weighing up options carefully thinking about the choice then ensuring implementation takes place are the three key facets of effective decision making and features of high performers. When this balanced process is in place in more organizations perhaps then can the abysmal performance we currently have in this core area be improved.

Royston

Just sleep on it and make better decisions

decision making / By Royston Morgan

Just sleep on it and the solution will come

I suppose many have read about recent research led by a leading expert on the benefits of napping at the University of California that suggests that Rapid Eye Movement (REM) sleep enhances creative problem-solving. At last now when I get caught sleeping on the job I have the perfect excuse. The study by Sara Mednick and Denise Cai graduate student in the UC San Diego Department of Psychology showed that REM directly enhances creative processing more than any other sleep or wake state.

“We found that — for creative problems that you’ve already been working on — the passage of time is enough to find solutions,” said Mednick. “However, for new problems, only REM sleep enhances creativity.”

The reason why taking a nap or leaving a problem for a while works has been researched for many years – and there is indeed evidence that leaving a problem then returning to it later does lead to the solution or more creative ideas emerging. As far as the REM sleep part is concerned it is likely to be a correlational finding and not related to the cause and effect of what they observed.

I like this idea but I think a clearer reason for this effect from information processing theory perspective is the way the brain divides up a problem during solution generation. In the initial representation of the problem the issues are encoded in working memory and a solution strategy worked out usually drawing on longer term constructs in memory from the last time the problem was faced (say). This initial solution strategy in working memory is what we typically use to first tackle the problem – and using this strategy more detail is fleshed out and the problem becomes clearer and more closely defined. This more detailed nature of the problem becomes stored in Long Term Memory.

If we leave a problem for a while, sleep on it say, the initial working memory solution gets forgotten – working memory being more volatile – whilst the more detailed knowledge of the problem gets retained in Long Term Memory. When we return to the problem we remember all the enhanced details of the problem but have to re-construct and make up a new approach to solving ‘it’. As we have more detailed understanding of the problem to be solved a better approach emerges – almost magically. So it is likely that those who take a break from a problem and return to it later are able to solve ‘it’ more effectively due to a process of selective ‘forgetting’ of the initial attempt at a solution.

Thus this is where a strategy of self-regulating your approach to tackling a problem can win dividends. What you have to do is rather than going on with a problem until the bitter end is say to yourself – ‘hold on I am going to do something else for a while and do this tomorrow’. What this implies that in some circumstances to procrastinate and delay is actually the best strategy to solve a difficult problem and going on when you are banging your head against a wall is a fruitless exercise.

Royston

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Bees show the way to making good decisions

decision making / By Royston Morgan

I read with interest an article in the Sunday paper this week on the assertion that Bees ‘Decision Making Strategy’ (sic) could help the business world to come to more informed decisions.

Apparently swarms send out ‘scouts’ to assess the quality of a potential site for a hive. The insects then report back to the old hive and do a ‘dance’ to describe the benefits of the site. The study concluded that the swarm then comes to a group decision on the best site by revisiting sites recommended by others until a consensus emerges and all the bees are performing the same ‘dance’. Actually of course there is no need for any kind of rationalisation process – bees returning from many potential sites will do a dance (‘large wiggle’ for lots of food, ‘direction of dance’ to show where it is and ‘length of path of dance’ to show distance from here) and bees communicate by ‘imprinting’ the movement of the dance in the hive until they get it then off they fly to have a look. Those sites that indeed have a good supply will result in more returning bees doing a repeat performance of the original dance whilst bees that return dissatisfied give a less that enthusiastic display. As a result of this reinforcement process bees will over time appear more frequently at the good sites which may look like a rational process has occurred but is in fact a conditioning process.

The study published in the Philosophical Transactions of the Royal Society measured the success of different decision-making processes and showed that if the bees relied on the ‘cosmic accident’ as they put it of all the bees eventually stumbling on the same site, it would leave the swarm homeless and vulnerable. On the other hand if the bees blindly followed the recommendations of other bees without checking the sites out for themselves there is no guarantee that it will be the best decision either.

The study concluded that sending out scouting groups resulted in the best decision. From this natural system they then made the leap of faith to suggest if Humans adopted this process then better investment decisions (for example) in the stock market could be made, groupthink avoided and investors will avoid getting stung! There is some truth in this as investment decisions are often made on the basis that if one stockbroker buys stock in a particular company then it must be good – thus a stampede is generated and everyone buys in and a bubble is created that eventually bursts. The lesson being that if decisions are made by considering options, whether there is real worth in a company (dividends etc.) before a decision made then this is a better decision making strategy.

In decision making strategies in the real world this is what is recommended, proactively acting on the world (scouting), deciding effectively by weighing and thinking about options then moving to action is a known and sound strategy. The problem is it takes thinking power to effect such an approach and there are few who actually do this in practice. In the normal run of events, when the economy is growing or things in a company are going well, then we can get away with sloppy decision making. What recent events have shown is that many so-called experts did not engage themselves in a deep way with their decision making, had little idea of what they are deciding and did not engage in down side risk analysis. Unfortunately all things that take significant cognitive resource and effort of will to do well – and in today’s quick and dirt world there is little reward for doing it right especially when sloppy thinking and management practice gets bailed out by the taxpayer as we are now witnessing across the world.

Royston