Strategis
Partners
Changing minds, stimulating innovation
Building a better process to support executive decision making
Jay Horton
www.strategispartners.com.au
Palisade Asia Pacific User Conference
Friday 14th September 2007
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This morning’s presentation in a nutshell
Decision making in all organisations contains
non-rational processes
Multiple forms of rationality need to be
harnessed to make better decisions
The effective decision process is one that
changes minds and stimulates innovation
1
Charles Handy
“I was in the grip of the myth of science,
the idea that everything, in theory,
could be understood, predicted
and, therefore, managed.”
Charles Handy, The Empty Raincoat, 1994
2
Your decision maker may feel nervous about the relying
on quantitative methods for decision making
Source:
I’m feeling insecure.
David Maister, Managing
the Professional Service
Firm, Free Press, 1993.
I’m feeling threatened.
I’m taking a personal risk.
I’m impatient.
I’m worried.
I’m exposed.
I’m feeling ignorant, and don’t like the feeling.
I’m skeptical.
I’m concerned that they won’t understand
what makes my situation special.
10. I’m suspicious.
1.
2.
3.
4.
5.
6.
7.
8.
9.
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… since like all of us, his decision making is influenced by
non-rational and emotional drivers
Decision making biases
We are risk averse
We anchor in the status quo
We are overconfident,
believing in our own expertise
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These non-rational drivers create hidden traps for decision makers
The major types of bias in decision making
Bias
Explanation
Example
Anchoring
Giving disproportionate weight to the
first information you receive
A CEO projects his own view of the manufacturing expansion
strategy for Indonesia by recalling his own prior manufacturing
experience in the U.S. In emerging economies, a “western-centric”
model is a recipe for project failure
Status quo
Favouring alternatives that perpetuate
the existing situation
An engineering design team develops an asset replacement plan for
the next 20 years based on a “like-for-like” replacement
Sunk costs
Making choices in a way that justifies
past, flawed choices
A construction materials executive backs a marginal quarry project,
to protect his earlier decisions. But the investment fails to pay-off
anyway
Confirming evidence
Seeking information that supports your A CEO considering restructuring asks the outsourcing supplier for
existing point of view
strategic advice. Supplier, of course, advises that outsourcing is the
way to go
Over-confidence
Being overly influenced by vivid
memories when estimating and
forecasting
Project costs never come in lower than the original estimate; in one
case they exceeded the estimate by a factor of two (or $250m)
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In many organisations organized anarchy describes much
decision making
1. Analysis is performed after the decision has been made
2. Information and analysis is used as signal and symbol
3. Decision analysis is subject to strategic misrepresentation
4. Much information gathered has little decision relevance
5. Much information and analysis is ignored
6. More information is always requested
7. Complaints about not enough information to make a decision
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… so it is often not useful to think simply of an organization as
a single, unified, rational decision making unit
Axioms of Decision Analysis
Real-world Contradiction
1a.
At least two alternatives can
be specified
The boss has already made up her mind
1b.
Possible consequences of each
alternative can be identified
“We know there are some things we do not know. But
there are also unknown unknowns, the ones we don't
know we don't know.”
U.S. Secretary of Defense Donald Rumsfeld, 2002
2.
The probabilities of the
consequence of each
alternative can be specified
“Goldman Sachs lost a packet when something
happened that their computers told them should occur
only once every 100 millennia.”
The Economist Magazine, August 16th 2007
3.
The utility of all consequences of
any alternative can be specified
There are organizations “without consistent,
shared goals.”
Cohen, March, and Olsen, 1972
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Is financial risk modelling itself non-rational?
General Formula for Project Value
n
Present Value = ∑
t =0
E (CF ) t
(1 + k ) t
The discount rate k represents
the cost of capital
In 2004 Fama and French
concluded that the problems with
the CAPM are serious enough to
invalidate its application, such as
for estimating the cost of capital 1
1. Eugene F. Fama and Kenneth R. French, “The Capital Asset Pricing Model: Theory and Evidence,” Journal of Economic Perspectives, V.18-3, 2004.
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This morning’s presentation in a nutshell
Decision making in all organisations contains
non-rational processes
Multiple forms of rationality need to be
harnessed to make better decisions
The effective decision process is one that
changes minds and stimulates innovation
9
A single view of the problem
can be dangerous
Under conditions of
uncertainty, multiple,
potentially contradictory
views of the problem may
be a better representation
of the available knowledge
than any single model
Failures of imagination
and groupthink may be
limiting the quality of
your organisation’s
decision making
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Multiple “lenses” are needed to steer the corporation of
the future - the analytic and the imaginative
“What we’ve got at GM now is a general
comprehension that you can’t run this
business by the left, intellectual,
analytical side of the brain. You have to
have a lot of right side, creative input.”
GM’s Vice Chairman Bob Lutz
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Quantitative data tells an important side of the story.
Qualitative information tells another
QUANTITATIVE FACTORS 1
QUALITATIVE FACTORS 2
Size of the computer model
Soundness of the assumptions
Number of colour graphics
Reputation of the analysts
Weight of the report
Accuracy of the forecasts
Cost of the software
Quality of the insights
Consultants’ fees
Veracity of the theory
Size of the team
Integrity of the model
1. Not everything that can be counted, counts.
2. Not everything that counts can be counted.
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The process of decision modelling is inextricably tied to the
process of convincing others of its integrity
“I don’t know what’s in your mathematical model
I don’t know what’s been left out of the model
I don’t know who supplied the data
I don’t know if the model is correct”
“So tell me why should we base our major decision
on your modelling results?”
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Minds, of course, are hard to change
How minds change: seven key factors 1
Resonance
Redescription
Rewards
Research
Reason
Real world
events
INFLUENCING
DECISION MAKERS
Overcoming
Resistance
1. Howard Gardner, Changing
Minds -The Art and Science of
Changing Our Own and Other
People’s Minds, Harvard
Business School Press, 2004.
CHANGE
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This requires the analyst build a dialogue with stakeholders
The best analysts communicate obsessively
Top
Management
Internal
Experts
Communication
Channels
Own
Team
External
Experts
Suppliers
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This morning’s presentation in a nutshell
Decision making in all organisations contains
non-rational processes
Multiple forms of rationality need to be
harnessed to make better decisions
The effective decision process is one that
changes minds and stimulates innovation
16
Three levels of decision support are relevant to good practice
1. The framework of principles, goals and objectives
2. The processes of organizational decision making
3. The tools for analysing decisions using both
quantitative and narrative methods
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What should be the goals of the decision process?
“Planning means changing minds,
not making plans”
Arie de Geus,
“Planning as Learning”
Harvard Business Review 1988.
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In all organisations there is a need to stimulate innovation
“Never, ever, think outside the box”
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These goals are achieved through a series of conversations
The organisational decision making process
Decision Makers
See
See
Opportunity
Opportunity
Approve
Frame
Approve
Analysis
Implement
Decision Support
Framing
Analysis
Interpret
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Framing means defining what must be decided, determining the objectives,
identifying alternatives, and establishing the logic for choice
“The framing of a problem is often
far more essential than its solution”
Albert Einstein
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“Assumption busting” starts with the decision making process
1.
Over the past few years, what surprised you most about the way your
organisation made its decisions?
2.
What deficiencies in decision making need fixing?
3.
What are our mavericks, outliers, and defectors telling us?
4.
What must your organisation retain in its decision making process?
5.
Five years into the future, what key characteristic of your decision process will
appear to be the most antiquated?
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Here are some ways to overcome the biases in decision making
How to overcome bias
Bias
Explanation
Overcoming the bias
Anchoring
Giving disproportionate weight to the Pursue other lines of thought in addition to your first one. Always view a
first information you receive
problem from different perspectives
Be open-minded. Seek information from a variety of people and sources
after thinking through the problem on your own
Status quo
Favouring alternatives that
perpetuate the existing situation
Ask if the status quo really serves your objectives
Ask if you’d choose the status quo if it weren’t the status quo
Downplay the effort or cost of switching from the status quo
Sunk costs
Making choices in a way that
justifies past, flawed choices
Get views of people who weren’t involved in the original decisions
Remind yourself that even the best managers make mistakes
Don’t encourage failure-fearing
Confirming evidence
Seeking information that supports
your existing point of view
Check whether you’re examining all evidence with equal rigour
Being overly influenced by vivid
memories when estimating and
forecasting
Be very disciplined in forecasting.
Start by considering extremes, and then challenge those extremes
Get actual statistics, not just impressions
Over-confidence
Ask a respected colleague to argue against your potential decision
Avoid “yes-men”
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Make use of the Decision Analyst’s communication toolset
Framing
Decision
Pyramids
Decision
Tables
List of Risks
Influence
Diagrams
Modelling
& Data
Collection
Decision
making
Evaluation
Spreadsheets
or other models
Tree
Rollback
Tornado
Diagrams
Risk
Profiles
Decision
Trees
Rainbow
Diagrams
Probability
Assessments
Value of
Information
Assumptions
Results
Insights
Recommendations
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In conclusion, embrace a more complete decision process
For you personally, there are big benefits if you:
Take on an expanded multi-rational
decision process; and make sure it
is understood by all
Listen to user needs and concerns
Use mechanisms to counter biases;
adopt “outsider” lenses
Get models and processes verified /
validated independently
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Strategis Partners works with clients in all industries to
help them make better decisions
Our clients benefit
through our expertise in:
Scenario planning
Strategy planning
Decision and risk analysis
Independent, strategic
advice in over 100
engagements in
Australia, Asia & Canada
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Thank you, and questions
“Most thought-provoking
in our thought-provoking time
is that we are still not thinking.”
Martin Heidegger
Copyright for the Lichtenstein works of art used in this presentation resides with the Estate of Roy Lichtenstein 27