After a decision problem has been properly framed with well-designed decision strategies, it’s time to evaluate the strategies on their potential ability to create value. You must not, however, use the wrong kind of evaluation method to avoid the more difficult effort of uncertainty analysis. Do so at your own peril.
What You Should Do
To reiterate, the purpose of this tutorial is to provide you with a mechanism to partition decision alternatives’ complexity into a manageable level of detail that will permit you to conduct effective business case analysis that neither mires you in analysis paralysis nor gives short shrift to uncertainties and risks . If you follow the guidance outlined in this tutorial, when you face a complex decision situation, you will obtain a manageable set of decision strategies with their accompanying descriptions and qualitative assessments that put you in position for that next step of analysis. Conceivably, you might be able to choose clearly the decision strategy you should take at this point. It’s conceivable, but not advisable. In my nearly 20 years of doing some form of decision and risk analysis and planning, only two or three times have I seen a client get to this stage knowing clearly what to do. The next step—which we explore in the first and fourth sections of this book—requires that we build a requisite, probabilistic financial model that compares and contrasts the relative potential value and risk of each decision strategy.
- 1.
Build an influence diagram that relates the decisions and conditional uncertainties to an objective, such as maximizing stakeholder value.
- 2.
Identify internal SMEs who can explain why each uncertainty might vary as a function of a chosen decision strategy.
- 3.Build a quantitative, probabilistic model that incorporates the information supplied by the SMEs and gives you the ability to do the following:
Explore the systematic relationships between the decisions and the uncertainties on the objective.
Prioritize your attention on critical uncertainties that could potentially make you regret choosing one strategy over the others so that you can develop tactics to mitigate the risk they might lead to.
Understand and communicate the value of trade-offs for choosing one decision over the others; that is, thoroughly comprehend the opportunity costs.
What You Should Not Do
You should build a model to assess the value of your decision strategies before you commit to any one of them. What you should not do is build the wrong kind of model, and I mean a very specific kind of wrong kind of model. Usually, some decision maker will tell you that you don’t have enough time or resources to build the right kind of model or populate it with the right kind of information. That decision maker is wrong and has usually not thought about how much time and additional expense will be incurred (which can be orders of magnitude larger than the cost of the planning phase in which mistakes are relatively cheap) to fix the problems caused by using the wrong kind of models to support complex business decision analysis. This business analog of technical debt in which a seemingly simple or easy solution is adopted instead of one that is more appropriately thorough yet takes a little more time to prepare has been the source of much weeping, wailing, and gnashing of teeth in the business world. The tendency to use these wrong kinds of models is usually accompanied by frustrated and impatient admonitions that “We have to do something now!”
Instead of the right kind of model, the—let’s graciously assume for now—well-intentioned but misguided decision maker will suggest some kind of weighted objectives scoring model by which each decision strategy is rated on an ordinal scale (e.g., 1–5) as to how well it potentially satisfies a set of criteria that are each given their own importance weightings. You should run from these approaches as fast as you can. In all seriousness, research by Douglas Hubbard1 and others has shown that these approaches appear to lead people to value-destroying decisions more often than not. In fact, it might even be the case that simply randomly selecting a decision strategy is more effective than using weighted objectives scoring types of selection models. Hubbard reported that people use these models, though, because they provide the emotional satisfaction of doing something simple that still appears to have some rigorous quantitative support behind it. In other words, they provide a placebo effect for the users.
- 1.
You will most likely fail to compensate mentally for the systematic variation in the key figures of merit that can be caused by underlying decisions, conditional uncertainties, and other factors. Instead, you will rely on estimating the value of key figures of merit at too high of a level of aggregated information. You might not be cutting down a tree with your bare hand, but you will be using a dull hatchet.
- 2.
You will not understand the potential value and risk in dollars of the proposed decision strategies. Consequently, you will not know how to prioritize all the other opportunities and problems you might need or want to address in the most effective economic manner.
- 3.
You will not know the rational upper bound on the amount you should spend to get better information (i.e., the value of information) about the uncertainties you face. In other words, your research budget will be another blind guess that compounds your exposure to risk.
- 4.
You will not know how to blend the best aspects of the two best competing decision strategies into a superior hybrid strategy, nor will you know the value of doing so (i.e., the value of control). In other words, if you’re lucky, you might choose a satisfactory solution when just a little additional effort could lead to a solution that the stakeholders would value more. Not expending the additional effort puts you in a position of potentially violating your fiduciary responsibilities. Yikes!
Please don’t misunderstand my point. I am not saying that if you do use these types of models that you will never experience favorable outcomes. What I am saying is that if you do use these types of models, you will possess little insight into why you experienced the outcomes you did and what you could have done to lead to better outcomes in the most economically effective manner.
Now, it’s your move.