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

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 problemSpecify your objectivesCreate imaginative alternativesUnderstand the consequencesGrapple with your tradeoffsClarify your uncertaintiesThink hard about your risk toleranceConsider linked decisions

PROBLEM: How to define your decision problem to solve the right problem

Be creative about your problem definitionTurn problems into opportunitiesDefine 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 proceedMaintain your perspective

OBJECTIVES: How to clarify what you are really trying to achieve with your

decision

Let your objectives be your guideWatch out for pitfalls – narrow focus;

insufficient time spentMaster the art of identifying objectives

Write down all concerns you want to addressConvert concerns into succinct objectivesSeparate ends from means to establish

fundamental objectives – Why? Why? Why? Why? Why?

Clarify what you mean by each objectiveTest 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 objectivesObjectives are personalDifferent objectives suit different problemsObjectives should not be limited to

availability or ease of use of dataFundamental objectives for similar problems

should remain relatively stable over time

ALTERNATIVES: How to make smarter choices by creating better

alternativesDon’t box yourself in with limited alternativesThe keys to generating between alternatives

Use objectives – ask “how?Challenge constraintsSet high aspirationsDo your own thinking firstLearn from experienceAsk others for suggestionsGive your subconscious time to operateCreate alternatives first; evaluate them laterNever stop looking for alternatives

ALTERNATIVES: How to make smarter choices by creating better alternatives

(continued)

Tailor your alternatives to your problemProcess alternatives – Ben Franklin ExampleWin-win alternativesInformation gathering alternativesTime-buying alternatives

Know when to quit looking

CONSEQUENCES: How to describe how well each alternative meets your objectivesDescribe consequences with appropriate

accuracyCompleteness and precision

Build a consequences tableMentally put yourself in the futureCreate a free-form description of each alternative’s

consequencesEliminate any clearly inferior alternativesOrganize descriptions of remaining alternatives into

a consequences table

Compare alternatives using a consequences table

CONSEQUENCES TABLE --

Deciding on a Summer Job

Alt A Alt B Alt C Alt D Alt ESalary 2,500$ 2,000$ 1,800$ 2,100$ 2,400$ Travel (min) 45 30 10 15 45Free-time Little/None Some Flexible Some Little/NoneExperience Great Minimal Good Good Very GoodWorking Cond Poor Good Excellent Good Poor

CONSEQUENCES: How to describe how well each alternative meets your objectives

(continued)Master the art of describing

consequencesTry before you buyUse common scales to describeDon’t rely on hard dataMake the most of available informationUse experts wiselyChoose sales that reflect an appropriate

level of precisionAddress major uncertainty head on

TRADEOFFS: How to make tough compromises when you can’t achieve all of

your objectivesFind and eliminate dominated

alternativesMake tradeoffs using even-swaps -- the

even swap methodDetermine the change necessary to cancel

our an objectiveAssess what change in another objective

would compensate for the needed changeMake the even swapCancel out the now irrelevant objectiveEliminate the dominated alternative

EVEN SWAP EXAMPLE --

Deciding on a Summer Job

Alt A Alt B Alt C Alt D Alt ESalary 2,500$ 2,000$ 1,800$ 2,100$ 2,400$ Travel (min) 45 30 10 15 45Free-time Little/None Some Flexible Some Little/NoneExperience Great Minimal Good Good Very GoodWorking Cond Poor Good Excellent Good Poor

EVEN SWAP EXAMPLE --

Deciding on a Summer Job

Alt A Alt B Alt C Alt D Alt ESalary 2,500$ 2,000$ 1,800$ 2,100$ 2,400$ Travel (min) 45 30 15 10 45Free-time Little/None Some Flexible Flexible Little/NoneExperience Great Minimal Good Good Very GoodWorking Cond Poor Good Excellent Good Poor

Alt A dominates Alt EAlt A dominates Alt E

Deciding on a Summer Job

Alt A Alt B Alt C Alt DSalary 2,500$ 2,000$ 1,800$ 2,100$ Travel (min) 45 30 15 10Free-time Little/None Some Flexible FlexibleExperience Great Minimal Good GoodWorking Cond Poor Good Excellent Good

EVEN SWAP EXAMPLE --

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

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

Deciding on a Summer Job

Alt A Alt B Alt C Alt DSalary 2,500$ 2,000$ 1,800$ 2,100$ Travel (min) 45 30 15 10Free-time Little/None Some Flexible FlexibleExperience Great Minimal Good GoodWorking Cond Poor Good Excellent Good

Deciding on a Summer Job

Alt A Alt B Alt C Alt DSalary 2,500$ 2,000$ 2,000$ 2,100$ Travel (min) 45 30 15 10Free-time Little/None Some Flexible FlexibleExperience Great Minimal Good GoodWorking Cond Poor Good Good Good

EVEN SWAP EXAMPLE --

Now D dominates C

Now D dominates C

Deciding on a Summer Job

Alt A Alt DSalary 2,500$ 2,100$ Travel (min) 45 10Free-time Little/None FlexibleExperience Great GoodWorking Cond Poor Good

And D also dominates B

And D also dominates B

Deciding on a Summer Job

Alt A Alt B Alt C Alt DSalary 2,500$ 2,000$ 2,000$ 2,100$ Travel (min) 45 30 15 10Free-time Little/None Some Flexible FlexibleExperience Great Minimal Good GoodWorking Cond Poor Good Good Good

EVEN SWAP EXAMPLE For Alternative A do the following even swaps:

Working conditions form Poor to Good; Salary from $2500 to $2400

Deciding on a Summer Job

Alt A Alt DSalary 2,400$ 2,100$ Travel (min) 45 10Free-time Little/None FlexibleExperience Great GoodWorking Cond Good Good

EVEN SWAP EXAMPLE For Alternative A do the following even swaps:

Experience from Great to Good; Travel Time from 45 to 30

Deciding on a Summer Job

Alt A Alt DSalary 2,400$ 2,100$ Travel (min) 30 10Free-time Little/None FlexibleExperience Good GoodWorking Cond Good Good

EVEN SWAP EXAMPLE For Alternative A do the following even swaps:

Salary from $2400 to 2000; Free time from Little to Flexible

Deciding on a Summer Job

Alt A Alt DSalary 2,000$ 2,100$ Travel (min) 30 10Free-time Flexible FlexibleExperience Good GoodWorking Cond Good Good

Now D dominates A so select D!Now D dominates A so select D!

TRADEOFFS: How to make tough compromises when you can’t achieve all of

your objectives (continued)

Practical dominanceone alternative dominates another except for a

minor difference – e.g. $25 salary

Practical advice for making even swapsMake the easier swaps firstConcentrate on the amount of the swap – not on

the perceived importance of the objectiveValue an incremental change based on what you

start withMake consistent swapsSeek out information to make informed swaps

UNCERTAINTY: How to think about and act on uncertainties affecting your decision

Distinguish smart choices from good consequencesA smart choice, a bad consequenceA poor choice, a good consequence

Use risk profiles to simplify decisions involving uncertainty

How to construct a risk profile Identify key uncertaintiesDefine outcomesAssign changes

Use judgment – consult existing information – collect new data – ask experts – break uncertainties into their components

Clarify the consequencesPicture 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

decisionsQuantify risk tolerance with desirability scoring

Desirability means “utility”

Assign desirability scores to all consequencesCalculate each consequence’s contribution to

the overall desirability of the alternativeCalculate each alternative's overall desirability

scoreCompare and choose

RISK TOLERANCE: How to account for your appetite for risk (continued)

Avoid pitfalls Over focus on the negativeFudging probabilities to account for risk Ignoring significant uncertaintyFoolish optimismAvoiding risky decisions because they are complexSubordinates who do not reflect your organization’s

risk tolerance in their decisionsOpen up new opportunities for managing risk

Share the riskSeek risk reducing informationDiversify the riskHedge the risk Insure against the risk

LINKED DECISIONS: How to plan ahead by effectively coordinating current and future

decisionsLinked decisions are complexMake smart linked decisions by planning

aheadFollow six steps to analyze linked decisions

Understand the basic decision problem Identify ways to reduce critical uncertainties Identify future decisions linked to the basic decisionUnderstand the relationships in linked decisionsDecide on what to do in the basic decisionTreat later decisions as new decision problems

Keep all your options open with flexible plansAll-weather plansShort-cycle plansOption wideners“Be prepared” plans

PSYCHOLOGICAL TRAPS: How to avoid some of the tricks your mind can play on

you when you are decidingNeglecting relevant information: the

anchoring trapPopulation of Turkey example (35MM vs

100MM anchor)The status quo trap

Chocolate bar vs. mug gift exampleSunk cost trap

Car repair example after accidentSeeing 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 trapFraming gains vs losses3 ships @ 200M per ship exampleRisk 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