making smart choices how to think about your whole decision problem john s. hammond, ralph l....
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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
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