Manage Uncertainty
“We demand rigidly defined areas of doubt and uncertainty!”Douglas Adams, The Hitchhiker's Guide to the Galaxy
Almost every decision we undertake has some level of uncertainty. As managers and leaders, we need to use every tool at our disposal to help us make the best decisions with the available information. Decision analysis and decision making processes are about helping you make the most informed decision possible.
Challenges of Uncertainty
Challenge: Decisions Under Uncertainty
Whether you are deciding to engage in a joint venture or what to do with your community’s pool, you need to weigh and balance a lot of information:
- Appropriate decision alternatives
- Quantitative input, such as life-cycle cost and cash flow projections
- Qualitative input, such as stakeholder opinion
- Organizational values
All of this information is subject to uncertainty—ranges of probable values for each. How do you manage that uncertainty when you select the optimal alternative?
Challenge: Cognitive Biases
All human beings are subject to a number of cognitive biases. We use heuristics to quickly evaluate alternatives and make decisions. In the complex world of modern business and municipal management, our “gut” and intuitive responses to complex decisions can often lead us to less desirable outcomes.
Solutions
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Decision Analysis
When faced with complex decisions, the number of alternatives and variables feeding your predicted outcomes can be very large.
Instead of simply reporting a weight-average with some “percent error” on value, wouldn’t it be nice to answer questions like:
- what is the probability this project will be worth less than x million dollars?
- what is the chance that rate payers will incur more than y dollars per litre for their treated water, if we proceed with this option?
Decision Analysis answers these kinds of questions for you and more.
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Decision-Making Processes
Our minds were great at keeping us alive in pre-history. But the quick-thinking instincts we used then get in the way of effective decision making in the modern world. (For a great, accessible treatment of this read Daniel Kahneman’s best-seller Thinking, Fast and Slow.)
Use a rigorous decision-making process to mitigate the effects of cognitive biases and help you make more effective decisions—both on the large and small scale.
The future is never clear: Uncertainty in your information leads to risk. There is no crystal ball, but the next best thing is to use analyses and processes that let you quantify that risk, minimize biases, and make informed decisions.
Decision Analysis
What can you do with Decision Analysis?
See every “what if”… at the same time
Decision analysis lets you see every “what if” scenario at the same time, and how that impacts your decision.
Select your best option
Highlight the optimal decision based on your metric of interest. Balance decisions against your organizational values.
Budget Confidently
Use variability and probability to budget realistically and understand risks.
Make hard choices
When you’re faced with a hard decision—one between two good options (or two bad ones)—you need rigorous methods to present you all the information in a way that makes sense.
Decision Analysis Applications
Decision Analysis is a set of tools that address the uncertainty in complex decision-making problems. These tools incorporate the uncertainty in every variable of the decision to identify those with the greatest effect on the metric being analysed.
Designed Specifically to Help You
As leaders, we often need to decide how to proceed. These decisions deal with:
- A course of action—a specific scenario of available alternatives
- Future values of variables and alternatives
Because we’re dealing with the future, there is uncertainty associated with every variable.
Addressing the combined uncertainty in these variables is a challenge. Decision Analysis is a sub-discipline of Decision Science that is designed specifically to deal with this challenge.
Applications
Almost every decision we undertake pertains to an uncertain future. Variable probability means risk of negative outcomes or chances of positive outcomes. Don’t ignore this risk by simply weight-averaging. Confront it head-on, use probability to be fully informed, and make the best decision possible with available information.
- Quantify the risk in your decisions
- See every “what if” scenario at the same time
- Determine how much more to study a question, and the value of further information
- Optimize how much to spend on controlling outcomes
Uncertainty means both the variation, and the probability of variation, is included in your decision. We roll all these together into your existing cash flow model, or build a decision model for you in specialty software.
When you massage away the variability by taking weighted averages, you only see the balance of probabilities. The inherent risk is lost. One option may be more expensive but less risky, while the other may be cheaper but carry a 10% risk of losing money. Depending on your situation, you may wish to pay more to mitigate that risk, or choose to accept it for chance of greater returns.
But you can’t make that decision without quantifying the risk.
When we build a decision analysis model for you, every possibility in every alternative is included in the analysis—along with its probability of occurrence.
That means you’re presented with every “what if” at the same time. You can choose the alternative that maximzes the chances of positive outcomes, while balancing risk and other organizational values.
One of the benefits of decision analysis is that you can quantify the amount you should spend on further research (assuming your decision metric is related to dollars). If this research can reduce uncertainties and reduce the risk in a decision alternative, there is a certain value associated with that. The value of perfect information shows you the maximum to spend on furthe study.
That being said, if further information won’t change your decision, then you should proceed with the decision and move on to implementation!
What does this mean? Consider that you’re submitting a proposal. If you can achieve greater marks on the evaluation by sub-consulting an expert, what is the maximum you should spend on this expertise? Or consider manufacturing: what is the maximum you should spend on cost controls in order to be the successful bid?
Three steps to quantifying risk
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Define the uncertainty in your decision variables
Uncertainty—the probability of variation in your input data—leads to risk (and potential benefit).
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Build an influence diagram
Build a causal model that shows how your variables interact. Link this directly to existing spreadsheet models.
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Use Monte Carlo methods to quantify risk
The model takes all the possibilities—every “what if”—and produces a graph showing the risk for each decision alternative. Alternatively, a decision tree highlights the optimal case.
How can Decision Analysis help your organization?
Let’s talk about itDecision-Making Processes
Rigorous processes for decision making provide a number of benefits:
Defensible Decisions
Make decisions that are easily defensible and justifiable to your stakeholders.
Balance Values
Balance your best alternatives against organizational values, risk tolerance, and stakeholder opinion.
Communicate Clearly
It’s easy to communicate with your stakeholders and demonstrate accountability with a documented decision-making trail.
Be Confident
When you’ve looked at all the available information and every alternative, you’re ready to move forward with committment and confidence.
Decision-Making Process Applications
A decision-making process helps you by taking you through all the important parts of your decision:
- What are you actually deciding upon? Why are you faced with this decision?
- What information do you have about the decision?
- What are your alternatives? What information informs each alternative?
- Which alternative maximizes your chance of positive outcomes, when incorporting uncertainty? (This is where decision analysis is applied for important decisions.)
- What are your organizational values? What tradeoffs are inherent in the best alternatives? (This is where you, as the decision maker, invoke your judgement.)
- Now you’re ready to move forward with confidence.
Applications
A decision making process can help you in both small, day-to-day decisions by ensuring you look at the whole picture. Quality decision-making on a small scale can add up over time. Culturing a rigorous decision-making process within your organization will benefit you over the long run.
These processes come into their own, however, when you’re faced with big decisions:
- Corporate: Should we Joint Venture with Company XYZ or not? (“Or not” is probably not the only alternative)
- Municipal government: Which is the optimal of various designs for this large piece of municipal infrastructure?
- Education: Which program should I offer in a satellite school?
If your organization is considering implementing something that takes a large amount of your resources, necessarily something else will be off the table. So even if you have been presented with a time-limited opportunity, you should consider your other options when deciding to move forward on the new opportunity. You may just find that when the chips fall, one of your other opportunities is more advantageous.
For instance, if you’re a provincially funded education organization providing training in remote communities, should you train a larger number of heavy equipment operators for a nearby building project two years out, or should you train a lesser number of care aids for a proposed care home for the elderly?
Both are positive for the community. One provides shorter term work but likely more aggregate income for the community; the other provides long term support for other community members and long-term employment for a smaller number of people. This is a difficult choice, and requires a carefully selected metric for decision analysis, community consultation, and clear balancing of values and tradeoffs.
Using a decision making process in this situation helps demonstrate the positive and negative aspects of each alternative, how you incorporated stakeholder opinion, and how organizational values were balanced.
Three steps to higher-quality decisions
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Adopt a decision-making process
There are many decision-making processes, and we can help you select one that meets your needs.
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Use the rubric every time
Making higher-quality decisions means that you will be making better-informed decisions more often. It doesn’t mean you’ll be right all the time, but you’ll be right more often, and that adds up.
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Culture it
Imprinting quality decision making into your organizational culture can pay big dividends over time. And when faced with big decisions you’ll have no problem—it will be part of your culture to make informed, efficient decisions with a committed follow up.