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PostSubject: Decision Making Strategies   Thu Mar 18, 2010 5:42 am

Decision Making Strategies

As you know, there are often many solutions to a given problem, and the decision maker's task is to choose one of them. The task of choosing can be as simple or as complex as the importance of the decision warrants, and the number and quality of alternatives can also be adjusted according to importance, time, resources and so on. There are several strategies used for choosing. Among them are the following:

1. Optimizing. This is the strategy of choosing the best possible solution to the problem, discovering as many alternatives as possible and choosing the very best. How thoroughly optimizing can be done is dependent on

A. importance of the problem
B. time available for solving it
C. cost involved with alternative solutions
D. availability of resources, knowledge
E. personal psychology, values

Note that the collection of complete information and the consideration of all alternatives is seldom possible for most major decisions, so that limitations must be placed on alternatives.

2. Satisficing. In this strategy, the first satisfactory alternative is chosen rather than the best alternative. If you are very hungry, you might choose to stop at the first decent looking restaurant in the next town rather than attempting to choose the best restaurant from among all (the optimizing strategy). The word satisficing was coined by combining satisfactory and sufficient. For many small decisions, such as where to park, what to drink, which pen to use, which tie to wear, and so on, the satisficing strategy is perfect.

3. Maximax. This stands for "maximize the maximums." This strategy focuses on evaluating and then choosing the alternatives based on their maximum possible payoff. This is sometimes described as the strategy of the optimist, because favorable outcomes and high potentials are the areas of concern. It is a good strategy for use when risk taking is most acceptable, when the go-for-broke philosophy is reigning freely.

4. Maximin. This stands for "maximize the minimums." In this strategy, that of the pessimist, the worst possible outcome of each decision is considered and the decision with the highest minimum is chosen. The Maximin orientation is good when the consequences of a failed decision are particularly harmful or undesirable. Maximin concentrates on the salvage value of a decision, or of the guaranteed return of the decision. It's the philosophy behind the saying, "A bird in the hand is worth two in the bush."

Quiz shows exploit the uncertainty many people feel when they are not quite sure whether to go with a maximax strategy or a maximin one: "Okay, Mrs. Freen, you can now choose to take what you've already won and go home, or risk losing it all and find out what's behind door number three."

Example: I could put my $10,000 in a genetic engineering company, and if it creates and patents a new bacteria that helps plants resist frost, I could make $50,000. But I could also lose the whole $10,000. But if I invest in a soap company, I might make only $20,000, but if the company goes completely broke and gets liquidated, I'll still get back $7,000 of my investment, based on its book value.

Example: It's fourth down and ten yards to go on your twenty yard line. Do you go for a long pass or punt? Maximax would be to pass; Maximin would be to punt.

Decision Making Procedure

As you read this procedure, remember our discussion earlier about the recursive nature of decision making. In a typical decision making situation, as you move from step to step here, you will probably find yourself moving back and forth also.

1. Identify the decision to be made together with the goals it should achieve. Determine the scope and limitations of the decision. Is the new job to be permanent or temporary or is that not yet known (thus requiring another decision later)? Is the new package for the product to be put into all markets or just into a test market? How might the scope of the decision be changed--that is, what are its possible parameters?
When thinking about the decision, be sure to include a clarification of goals: We must decide whom to hire for our new secretary, one who will be able to create an efficient and organized office. Or, We must decide where to go on vacation, where we can relax and get some rest from the fast pace of society.

2. Get the facts. But remember that you cannot get all the facts. Get as many facts as possible about a decision within the limits of time imposed on you and your ability to process them, but remember that virtually every decision must be made in partial ignorance. Lack of complete information must not be allowed to paralyze your decision. A decision based on partial knowledge is usually better than not making the decision when a decision is really needed. The proverb that "any decision is better than no decision," while perhaps extreme, shows the importance of choosing. When you are racing toward a bridge support, you must decide to turn away to the right or to the left. Which way you turn is less important than the fact that you do indeed turn.

As part of your collection of facts, list your feelings, hunches, and intuitive urges. Many decisions must ultimately rely on or be influenced by intuition because of the remaining degree of uncertainty involved in the situation.

Also as part of your collection of facts, consult those who will be affected by and who will have to implement your decision. Input from these people not only helps supply you with information and help in making the decision but it begins to produce the acceptance necessary in the implementers because they feel that they are part of the decision making process. As Russell Ackoff noted in The Art of Problem Solving, not consulting people involved in a decision is often perceived as an act of aggression.

3. Develop alternatives. Make a list of all the possible choices you have, including the choice of doing nothing. Not choosing one of the candidates or one of the building sites is in itself a decision. Often a non decision is harmful as we mentioned above--not choosing to turn either right or left is to choose to drive into the bridge. But sometimes the decision to do nothing is useful or at least better than the alternatives, so it should always be consciously included in the decision making process.

Also be sure to think about not just identifying available alternatives but creating alternatives that don't yet exist. For example, if you want to choose which major to pursue in college, think not only of the available ones in the catalog, but of designing your own course of study.

4. Rate each alternative. This is the evaluation of the value of each alternative. Consider the negative of each alternative (cost, consequences, problems created, time needed, etc.) and the positive of each (money saved, time saved, added creativity or happiness to company or employees, etc.). Remember here that the alternative that you might like best or that would in the best of all possible worlds be an obvious choice will, however, not be functional in the real world because of too much cost, time, or lack of acceptance by others.

Also don't forget to include indirect factors in the rating. If you are deciding between machines X, Y, and Z and you already have an employee who knows how to operate machine Z, that fact should be considered. If you are choosing an investigative team to send to Japan to look at plant sites and you have very qualified candidates A, B, and C, the fact that B is a very fast typist, a superior photographer or has some other side benefit in addition to being a qualified team member, should be considered. In fact, what you put on your hobbies and interests line on your resume can be quite important when you apply for a job just because employers are interested in getting people with a good collection of additional abilities.

5. Rate the risk of each alternative. In problem solving, you hunt around for a solution that best solves a particular problem, and by such a hunt you are pretty sure that the solution will work. In decision making, however, there is always some degree of uncertainty in any choice. Will Bill really work out as the new supervisor? If we decide to expand into Canada, will our sales and profits really increase? If we let Jane date Fred at age fifteen, will the experience be good? If you decide to marry person X or buy car Y or go to school Z, will that be the best or at least a successful choice?

Risks can be rated as percentages, ratios, rankings, grades or in any other form that allows them to be compared. See the section on risk evaluation for more details on risking.

6. Make the decision. If you are making an individual decision, apply your preferences (which may take into account the preferences of others). Choose the path to follow, whether it includes one of the alternatives, more than one of them (a multiple decision) or the decision to choose none.

And of course, don't forget to implement the decision and then evaluate the implementation, just as you would in a problem solving experience.

One important item often overlooked in implementation is that when explaining the decision to those involved in carrying it out or those who will be affected by it, don't just list the projected benefits: frankly explain the risks and the drawbacks involved and tell why you believe the proposed benefits outweigh the negatives. Implementers are much more willing to support decisions when they (1) understand the risks and (2) believe that they are being treated with honesty and like adults.

Remember also that very few decisions are irrevocable. Don't cancel a decision prematurely because many new plans require time to work--it may take years for your new branch office in Paris to get profitable--but don't hesitate to change directions if a particular decision clearly is not working out or is being somehow harmful. You can always make another decision to do something else.

Because making decisions involves a degree of risk, it would be helpful to examine risk and risk analysis in this chapter in order to gain an understanding of what is involved. Risk and uncertainty create anxiety, yet they are necessary components of an active life.

General Comments on Risk Taking

1. Only the risk takers are truly free. All decisions of consequence involve risk. Without taking risks, you cannot grow or improve or even live.

2. There is really no such thing as permanent security in anything on earth. Not taking risks is really not more secure than taking them, for your present state can always be changed without action on your part. If you don't take the risk of dying by driving to the store, your house could collapse on you and kill you anyway.

3. You are supposed to be afraid when you risk. Admit your fears--of loss, of rejection, of failure.

4. Risking normally involves a degree of separation anxiety--the anxiety you feel whenever you are removed from something that makes you feel secure. Many children feel this when they first leave their parents for school. Some college students feel this when they go off to college. Travelers sometimes feel it when they get homesick. The way to overcome separation anxiety is to build a bridge between the familiar and secure and the new. Find out what the new place--school or country--is like and how its elements compare to familiar and secure things at home. Take familiar things with you--books, teddy bear, popcorn popper, whatever.

The same is true of all risks. Make the opportunity as familiar as possible and learn as much about it as you can before you release the security of the old. Find out about the new job, its location, the lifestyle of those who live there, and so on.

The Orthodox Theory of Risk Evaluation

The traditional strategy for evaluating risks is to use an expected value calculation, based on the simple idea that the expected value of a risk is the value of the possible outcome discounted by the probability of its realization. The formula is EV=PR or expected value equals prize times risk (or chance). Thus, if you have one chance in a million of winning a million dollars, your expected value is one dollar (which is one millionth of a million dollars). Expected value calculations are often used when comparing an amount of money to be invested with the probable payoff. (Note: if the risk is, for example, one in twenty, you can divide the prize by twenty, which is the same as multiplying the prize by one twentieth.)

Let's take a typical state lottery, for example. The investment for a ticket is a dollar. The usual prize is about $6,500,000 and the chance of winning is about one in 14,800,000. By discounting the possible outcome by the chance of winning (dividing $6.5 million by 14.8 million), we discover that the expected value of the lottery ticket is about 43.9 cents. Since a ticket costs $1.00 (more than twice as much as its expected value), we would conclude that this is a poor risk. Only when the expected value meets or exceeds the required expense is the risk considered worth taking, according to this theory.
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