MAKING SMART CHOICES

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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
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Eight keys to effective decision making

• Work on the right decision problem
• Specify your objectives
• Create imaginative alternatives
• Understand the consequences
• Grapple with your tradeoffs
• Clarify your uncertainties
• Think hard about your risk tolerance
• Consider linked decisions

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

• Be creative about your problem definition
• Turn problems into opportunities
• Define 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 proceed
• Maintain your perspective

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

• Let your objectives be your guide
• Watch out for pitfalls narrow focus
  insufficient time spent
• Master the art of identifying objectives
• Write down all concerns you want to address
• Convert concerns into succinct objectives
• Separate ends from means to establish fundamental
  objectives Why? Why? Why? Why? Why?
• Clarify what you mean by each objective
• Test objectives to see if they capture your
  interests

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OBJECTIVES How to clarify what you are really
trying to achieve with your decision (continued)

• Practical advice for nailing down objectives
• Objectives are personal
• Different objectives suit different problems
• Objectives should not be limited to availability
  or ease of use of data
• Fundamental objectives for similar problems
  should remain relatively stable over time

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ALTERNATIVES How to make smarter choices by
creating better alternatives

• Dont box yourself in with limited alternatives
• The keys to generating between alternatives
• Use objectives ask how?
• Challenge constraints
• Set high aspirations
• Do your own thinking first
• Learn from experience
• Ask others for suggestions
• Give your subconscious time to operate
• Create alternatives first evaluate them later
• Never stop looking for alternatives

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ALTERNATIVES How to make smarter choices by
creating better alternatives (continued)

• Tailor your alternatives to your problem
• Process alternatives Ben Franklin Example
• Win-win alternatives
• Information gathering alternatives
• Time-buying alternatives
• Know when to quit looking

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CONSEQUENCES How to describe how well each
alternative meets your objectives

• Describe consequences with appropriate accuracy
• Completeness and precision
• Build a consequences table
• Mentally put yourself in the future
• Create a free-form description of each
  alternatives consequences
• Eliminate any clearly inferior alternatives
• Organize descriptions of remaining alternatives
  into a consequences table
• Compare alternatives using a consequences table

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CONSEQUENCES TABLE --

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CONSEQUENCES How to describe how well each
alternative meets your objectives (continued)

• Master the art of describing consequences
• Try before you buy
• Use common scales to describe
• Dont rely on hard data
• Make the most of available information
• Use experts wisely
• Choose sales that reflect an appropriate level of
  precision
• Address major uncertainty head on

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TRADEOFFS How to make tough compromises when you
cant achieve all of your objectives

• Find and eliminate dominated alternatives
• Make tradeoffs using even-swaps -- the even swap
  method
• Determine the change necessary to cancel our an
  objective
• Assess what change in another objective would
  compensate for the needed change
• Make the even swap
• Cancel out the now irrelevant objective
• Eliminate the dominated alternative

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EVEN SWAP EXAMPLE --

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EVEN SWAP EXAMPLE --
Alt A dominates Alt E

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EVEN SWAP EXAMPLE --

Alt D practically dominates Alt C swap salary
increase to 2000 w/ drop in working condition
from Excellent to Good
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EVEN SWAP EXAMPLE --

Now D dominates C
And D also dominates B
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EVEN SWAP EXAMPLE

• For Alternative A do the following even swaps
• Working conditions form Poor to Good Salary from
  2500 to 2400

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EVEN SWAP EXAMPLE

• For Alternative A do the following even swaps
• Experience from Great to Good Travel Time from
  45 to 30

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EVEN SWAP EXAMPLE

• For Alternative A do the following even swaps
• Salary from 2400 to 2000 Free time from Little
  to Flexible

Now D dominates A so select D!
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TRADEOFFS How to make tough compromises when you
cant achieve all of your objectives (continued)

• Practical dominance
• one alternative dominates another except for a
  minor difference e.g. 25 salary
• Practical advice for making even swaps
• Make the easier swaps first
• Concentrate on the amount of the swap not on
  the perceived importance of the objective
• Value an incremental change based on what you
  start with
• Make consistent swaps
• Seek out information to make informed swaps

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

• Distinguish smart choices from good consequences
• A smart choice, a bad consequence
• A poor choice, a good consequence
• Use risk profiles to simplify decisions involving
  uncertainty
• How to construct a risk profile
• Identify key uncertainties
• Define outcomes
• Assign changes
• Use judgment consult existing information
  collect new data ask experts break
  uncertainties into their components
• Clarify the consequences
• Picture risk profiles with decision trees

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RISK TOLERANCE How to account for your appetite
for risk

• Understand your willingness to take risks
• Incorporate your risk tolerance into your
  decisions
• Quantify risk tolerance with desirability scoring
• Desirability means utility
• Assign desirability scores to all consequences
• Calculate each consequences contribution to the
  overall desirability of the alternative
• Calculate each alternative's overall desirability
  score
• Compare and choose

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

• Avoid pitfalls
• Over focus on the negative
• Fudging probabilities to account for risk
• Ignoring significant uncertainty
• Foolish optimism
• Avoiding risky decisions because they are complex
• Subordinates who do not reflect your
  organizations risk tolerance in their decisions
• Open up new opportunities for managing risk
• Share the risk
• Seek risk reducing information
• Diversify the risk
• Hedge the risk
• Insure against the risk

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

• Linked decisions are complex
• Make smart linked decisions by planning ahead
• Follow six steps to analyze linked decisions
• Understand the basic decision problem
• Identify ways to reduce critical uncertainties
• Identify future decisions linked to the basic
  decision
• Understand the relationships in linked decisions
• Decide on what to do in the basic decision
• Treat later decisions as new decision problems
• Keep all your options open with flexible plans
• All-weather plans
• Short-cycle plans
• Option wideners
• Be prepared plans

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PSYCHOLOGICAL TRAPS How to avoid some of the
tricks your mind can play on you when you are
deciding

• Neglecting relevant information the anchoring
  trap
• Population of Turkey example (35MM vs 100MM
  anchor)
• The status quo trap
• Chocolate bar vs. mug gift example
• Sunk cost trap
• Car repair example after accident
• Seeing what you want to see the confirming
  evidence trap

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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 trap
• Framing gains vs losses
• 3 ships _at_ 200M per ship example
• Risk 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