Tuesday, July 14, 2015

The “Confidence” Behind Decision Making

It takes both "Thinking Fast (intuition) and Thinking Slow (analytics)" to gain enough confidence in making effective decisions.

One of the most important tasks for management is to make decisions, however, across the sectors, many business leaders fail to make effective decisions, Being decisive, getting to the root cause, defining problems are all important, but very few can get them all right, so what’re the mechanisms shall you use, or what is "confidence" in the world of business and where does it fit into the decision making frameworks of organizations?

Re-framing a problem: Any problem is essential if you're going to side-step the "but we've always done it this way" syndrome. Groundbreaking decisions require breaking new ground before the decisions are made. Reframing changes the idea-space you're confronted with, enabling the previously "unthinkable" to potentially present itself as "the only reasonable solution." From a business systemic point of view, there are unplanned events that occur at random and whose frequency depends on the business' environment it operates in. You can view the events as opportunities to profit from, not just the risks for mitigation. So re-framing the problems by asking the right questions helps to make effective decisions.

Statistical and “Gut feeling” confidence: It takes both "Thinking Fast (intuition) and Thinking Slow (analytics)" to gain enough confidence in making effective decisions. The decision maker’s "gut feeling" represents the ongoing sum of their experiences at (a) estimating the likelihood of a downside event occurring, (b) estimating the magnitude of the impact of the event which may occur in their plans; and, (c) knowing the tolerance of their enterprise for the resulting downside risk. Reliance on "gut feel" is riskier in new ventures where there is less of a track record and in today's markets and economic systems which do not always perform exactly as they have in the past. And there are two types of confidence in making effective decisions. Confidence in relation to statistical estimates is a quantification of the uncertainty remaining following measurement. Confidence in gut feel is a psychological sense of certainty in the face of unquantified uncertainty. Having engaged in some measurement for making decisions, you have reduced the uncertainty, but having quantified the degree of uncertainty remaining, managers do not feel psychological confidence. In contrast, having no measurement of the uncertainty, managers have no difficulty "feeling" confident. Ironically, investing in efforts to reduce uncertainty makes managers feel less confident because such efforts make the remaining uncertainty loom larger than their sense of uncertainty prior to measurement.

Defining and highlighting uncertainty: One reason managers prefer gut feel is that they often measure what is easy to measure, or what they are required to measure, leaving the most important variables unmeasured except by gut feeling. Most risks are taken because decision makers don't know they are taking them. Investing in efforts to reduce uncertainty highlights the uncertainty which cannot be reduced. Defining and highlighting the uncertainties that cannot be reduced and the potential impact of these uncertainties allows for a better-informed decision process and determination as to whether the uncertainty is within the risk tolerance of the enterprise to which the manager should be tuned. It also allows for the establishment of metrics and "early warning" triggers for downside risks, for which there might be contingency plans established.

Due to the complexity, ambiguity and unpredictability of business dynamic, it is not possible to make effective decisions via pure gut feeling or ivory tower approach, the digital decision-making style is to think fast and slow, think independently and leverage multiple perspectives. analyze and synthesize for making the right decisions at the right time by the right people.


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