What does it mean to make a big decision in the face of uncertainty?
Big decisions made in today’s fluid and complex world are done under conditions of uncertainty. These conditions surface when the future is unpredictable and things are in a state of flux. Individuals are unaware of every possible variation or alternative decision. Not to mention their associated risks, their probabilities, and their consequences. Of course, decision-making under conditions of certainty is clearer. Conditions of certainty are present when the individual has reliable information. Clear information clarifies the alternatives, the conditions of each alternative, and the associated outcomes. It is easy to see how with more certainty, individuals use accurate, measurable, and reliable information in decision-making and good decisions tend to follow.
Let’s illustrate using a real-life example to set the stage. Julie (name changed) very recently made the decision to leave her secure influential executive position in a Midwestern (US) company. She helped grow the start-up into a U$325 million annual revenue reporting company over the last decade. She left her role without securing a new one. You might think she’s crazy to take this risk in the midst of a pandemic, rising unemployment, and a generally uncertain environment.
But as Einstein once said: “In the middle of difficulty lies opportunity.”
Julie is no fool, she made a carefully considered decision prompting the natural question of: “what skills support her in making a life-changing decision in the face of uncertainty?”
Timeless principles for decision making
Unsurprisingly, many psychological studies conducted indicate that most individuals are risk-averse and avoid uncertainty (and its inherent risk) wherever possible. Should we infer from these studies that only risk-neutral or risk-seeking individuals will make tough decisions in the face of uncertainty? Of course not! We should infer that to do so, requires a robust decision-making framework and effective skills to apply it well.
Let’s consider first, the basic decision-making principles applicable to all decisions before we dive more deeply into tough decisions under uncertainty. Peter Bregman captured the idea nicely in his HBR article.
- Use autopilot as a habit for routine decisions: The concept here is to avoid expending energy on repetitive and trivial decisions, such as what to eat for breakfast. My wife, for example, loves oatmeal so that decision is very quick. She can use her energy for other activities during the day.
- Use an “if/then” approach for unpredictable choices. The concept here is to use boundaries to define a response. For example, if I live in a wet climate and I open the door to a grey sky….my if/then approach kicks in. I don’t know if it will rain but I’ve predetermined that a grey sky causes me to take an umbrella.
- Use a time limit. The concept here is that reasonably equal choices don’t produce a clear or right answer, so perhaps the best decision is to “just decide”. For example, if I am debating between a date-night at the movies or at the theatre and neither choice is better, then I just need to pick one and save my energy for the date!
The basic decision-making process
The basic decision-making flow is one of a frame, analysis, and then decision to act.
This technique is helpful in most cases but lacks a connection when it comes to making big decisions under uncertainty. We will explore that next.
Big decisions under uncertainty
In uncertainty, individuals lack complete (or sufficient) information about alternatives and the information gleaned may be unreliable. Faced with these odds, individuals must bridge the gaps with assumptions from which decisions can then be made. It is easy to imagine a great deal of diversity in the skill of making good assumptions with incomplete information. In reality, individuals need to depend on their ability to make judgments and on their experience when making decisions.
So, what approaches can you use to improve your ability to make good decisions in uncertain conditions?
There are several techniques:
- The tried-and-true risk analysis approach
- Using a decision tree approach
- Applying the utility theory approach
Looking at each one a little more closely.
A risk analysis approach is one based on qualitative and quantitative analysis and effectively looks at the trade-off between the benefits and risks of a given option. To illustrate, Gaopeng, a marketing manager, is evaluating a new product launch. He must assess several variables. In particular, production costs, R&D costs, market pricing, marketing costs, market size, and market share expected. In assessing each of these unknown variables, he establishes both the benefits and the risks – the aggregate of which forms the basis of his decision-making.
A decision tree approach is visual, mapping the alternative options, their possible outcomes, and the risks associated with each one. This technique allows decision-making to logically follow the optimum decision.
The third approach, utility theory or preference theory is premised on the idea that individual attitudes towards risk vary. Some individuals have a low-risk tolerance (risk avoiders), while others are happy to assume greater risks (gamblers). Under this model, we assume decision-makers rationally follow the assigned probabilities. For example, if there is a 70% probability of market success, it appears reasonable that a decision-maker would take the risk. That said, a given individual might not take the risk, as the probability of making the wrong decision is 30%. Risk appetite varies, of course, with events, circumstances, and people.
For example, a CFO might be quite comfortable launching a marketing and advertising campaign with a 75% chance of success but might decide against investing in an expensive new manufacturing plant unless the odds of success are higher than 75% for large capital investments.
Personal risk attitudes differ; however, two facts remain:
- Risk attitudes vary: An individual may be a risk avoider in some situations and a gambler in others.
- Risk appetites vary: Some individuals are highly risk-averse and others risk-neutral or risk-seeking.
Interestingly, researchers find that when the stakes are high, most individuals tend to be risk avoiders and when stakes are small, they tend to be gamblers.
The big decision made, Julie is looking toward an exciting blank canvas in her area of passion: digital transformation.
Knowing that making big changes in an environment of uncertainty requires high levels of experience and judgment, where do you fit on the skill continuum?
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