Key takeaways from “Smart Choices”

From Howard Raiffa’s book “Smart Choices”

Key takeaways from “Smart choices”

“The only way to really raise your odds of making a good decision is to learn to use a good decision-making process—one that gets you to the best solution with a minimal loss of time, energy, money, and composure. An effective decision-making process will fulfill these six criteria:

It focuses on what’s important.
It is logical and consistent.
It acknowledges both subjective and objective factors and blends analytical with intuitive thinking.
It requires only as much information and analysis as is necessary to resolve a particular dilemma.
It encourages and guides the gathering of relevant information and informed opinion.
It is straightforward, reliable, easy to use, and flexible.” (p. 3)

Here are 8 of the most common mistakes in decision making: (p. 189)

Working on the wrong problem
Failing to identify your key objectives
Failing to develop a range of good, creative alternatives
Overlooking crucial consequences of your alternatives
Giving inadequate thought to tradeoffs
Disregarding uncertainty
Failing to account for your risk tolerance
Failing to plan ahead when decisions are linked over time

PROACT

“We have found that even the most complex decision can be analyzed and resolved by considering a set of eight elements (see below). The first five— Problem, Objectives, Alternatives, Consequences, and Tradeoffs— constitute the core of our approach and are applicable to virtually any decision. The acronym for these—PrOACT—serves as a reminder that the best approach to decision situations is a proactive one.”
“The three remaining elements—uncertainty, risk tolerance, and linked decisions—help clarify decisions in volatile or evolving environments. Some decisions won’t involve these elements, but many of your most important decisions will.” (p.6)

Problem

“You can make a well-considered , well-thought-out decision, but if you’ve started from the wrong place—with the wrong decision problem—you won’t have made the smart choice. The way you state your problem frames your decision. It determines the alternatives you consider and the way you evaluate them. Posing the right problem drives everything else.” (p. 15)
“So what’s the best method for defining—or redefining—your decision problem? Start by writing down your initial assessment of the basic problem, then question it, test it, hone it.” (p. 19)
“Gain fresh insights by asking others how they see the situation. After you’ve asked, answered, and reviewed all of the above questions to your satisfaction, get some other perspectives. Depending on the nature of the problem, you might seek advice from a family member, a knowledgeable friend, an acquaintance who has faced a similar problem, or a professional in a relevant field. Their ideas will help you see your problem in a new light, perhaps revealing new opportunities or exposing unnecessary, self-imposed constraints. If you can’t actually talk to anyone, it can even be worthwhile to imagine how others might think. Ask, for example: How would my accountant see this problem? How would my boss look at it? Don’t be afraid to be creative. If you’re a politician, you might want to imagine how Harry Truman or Winston Churchill would have thought about the problem you’re facing.” (p. 22)
“Chances to redefine your problem are opportunities that often lead to better decisions. So, from time to time as you work your way through the decision-making process, ask yourself: Am I working on the right problem? Questioning the problem is particularly important when circumstances are changing rapidly or when new information becomes available. A poorly formulated decision problem is a trap. Don’t fall into it.” (p. 24)

Objectives

“You’ve formulated the right decision problem. Now, before you rush into making the actual decision, pause and think hard about your objectives. What do you really want? What do you really need? What are your hopes? your goals? Answering these questions honestly, clearly, and fully puts you on track to making the smart choice.” (p. 31)
“Why are objectives so important? They form the basis for evaluating the alternatives open to you. They are, in other words, your decision criteria. By making sure you’ve identified all your objectives, you will avoid making an unbalanced decision—one that, for example, considers financial implications but ignores personal fulfillment. In addition, a full set of objectives can help you think of new and better alternatives, looking beyond the immediately apparent choices.” (p. 31)
“Sometimes, the process of thinking through and writing out your objectives can guide you straight to the smart choice—without your having to do a lot of additional analysis.” (p. 32)
“Objectives are very personal, but they need not be self-centered. Depending on the decision, the objectives you establish can reflect concerns for your family, your employer, your community and country, even the whole of society.” (p. 31)
Example 1: “Imagine that you’re a freelance writer and you’ve just completed a long assignment writing a computer training manual for a large company. Now you’re looking for your next job. Your immediate inclination is to solicit similar work from other big companies—that course would fulfill your objectives for maximizing your income and building your business portfolio. But then you begin to think of other objectives that are also important to you: supporting your community, helping the less fortunate, broadening your experience. You decide to take a lower-paying job writing a fundraising letter and brochure for a local hospice for AIDS patients. Even though you’ve forgone some income, you soon realize that, by looking beyond your own concerns, you’ve made a wise decision.” (p. 31)
Example 2: “Imagine that your boss has just offered you a promotion. The new job, which requires you to move cross-country from San Diego to New York City, has a considerably higher salary. Your gut reaction is ‘‘Great, just what I wanted!’’ But careful thinking about your full set of objectives gives you reason to hesitate. While the new position would be advantageous financially, the move would disrupt the lives of your spouse, your 12-year-old twin boys, and yourself.

Working with your family, you determine your most important objectives: to promote your family’s quality of life, to further your professional development, and to contribute to your firm. When you look back at the offer in light of these objectives, your view changes dramatically. You realize that your family’s love of warm weather and outdoor recreation makes it likely that their quality of life would suffer in New York.

You see that, although your new position would be challenging and satisfying, it’s actually less suited to your talents and interests than your current job. And you decide that your contributions to your firm would be about the same in either position. The money would indeed be better in New York, but maximizing your income, you now see, is only one of your fundamental objectives. Your decision is suddenly clear-cut. You decline the promotion, explaining your reasoning in clear and compelling terms to your boss.” (p. 33)
“Even when the answer isn’t so obvious, the objectives you set will help guide your entire decision-making process, from defining alternatives at the outset, to analyzing those alternatives, to justifying the choice you ultimately make.” (p. 33)
Objectives help you determine what information to seek. “You’ve been offered a job at a new employer. In setting out your objectives, you realize that the work environment is critically important to you. You log on to the Internet and browse through your prospective employer’s web site to find out what it indicates about the firm’s culture.” (p. 33)
Objectives can help you explain your choice to others. “Your boss asks you to justify a recent decision to sign a long-term service contract for your company’s photocopying machines. Armed with your list of objectives, you walk her through you thought process, showing how your decision fulfilled the key objectives better than the other alternatives.”
Objectives determine a decision’s importance and, consequently, how much time and effort it deserves. “If the time of tomorrow’s dentist appointment makes little difference in what really matters to you, why fuss over it?” (p. 34)
“Whenever you feel that your decision process is bogging down or heading off course, always focus back on your objectives. They’ll keep you on the right track.” (p. 34)

What are some common mistakes people make when thinking about objectives?

“Often, decisions makers take too narrow a focus. Their list of objectives remains brief and cursory, omitting important considerations that become apparent only after they have made a decision. They concentrate on the tangible and quantitative (cost, availability) over the intangible and subjective (features, ease of use). ‘‘Hard’’ concerns drive out the ‘‘soft.’’ In addition, they tend to stress the short term (enjoy life today) over the long term (have a comfortable retirement).” (p. 34)
These missteps occur for two main reasons. First, many people spend too little time and effort on the task of specifying objectives. They feel they already know what they want and need. Without further reflection, they immediately pick an alternative that seems to ‘‘solve’’ their problem and they move on. Only later, when things turn out less well than anticipated, do they realize that they didn’t really understand their objectives after all. By then, of course, it’s too late.” (p. 34)
“Second, getting it right isn’t easy. Objectives don’t just pop up in nice neat lists. While you might think you know what you want, your real desires may actually be submerged—buried beneath the desires others have for you, beneath societal expectations and norms, beneath everyday concerns. For important decisions, only deep soul-searching will reveal what really matters—to you.” (p. 35)
“Objectives are personal. Different people facing identical situations may have very different objectives. For example, a single person investing for retirement may care only about a mutual fund’s long-term value, whereas a married person might also care about the fund’s interim value, as it would help support her family in case of her early death.” (p. 42)

Here are some steps to help you identify your objectives.

Step 1: “Write down all the concerns you hope to address through your decision. Thrash about as much as necessary. Don’t worry about being disorganized or mixing up major concerns with ones that seem trivial. This early in the process, too much orderliness will only inhibit your creativity. Use as many ways as you can think of to jog your mind about present, future, and even hidden concerns. Don’t worry if you sometimes seem to be saying the same thing in different ways. Rephrasing the same concern may help you uncover important nuances. Flesh out your list by trying some of these techniques:” (p. 35)
Compose a wish list. Describe as completely as you can everything that you could ever want from your decision. What would make you really happy?
Think about the worst possible outcome. What do you most want to avoid?
Consider the decision’s possible impact on others. What do you wish for them?
Ask people who have faced similar situations what they considered when making their decision.
Consider a great—even if unfeasible—alternative. What’s so good about it?
Consider a terrible alternative. What makes it so bad?
Think about how you would explain your decision to someone else. How would you justify it? Your answers may uncover additional concerns.
When facing a joint or group decision, one involving family or colleagues, for instance, first have each person involved follow the above suggestions individually. Then combine the lists, using the varied perspectives to expand and refine first-take ideas. By initially freeing each person to search his or her mind without being limited by others’ thoughts, you’ll get a more comprehensive list that more accurately reflects everyone’s concerns.” (p. 36)

Alternatives

“Alternatives are the raw material of decision making. They represent the range of potential choices you’ll have for pursuing your objectives. Because of their central importance, you need to establish and maintain a high standard for generating alternatives. Two important points should be kept in mind at all times. First, you can never choose an alternative you haven’t considered. A terrific house in a great neighborhood may be available for rent, but if you’re unaware of it, you won’t end up there. Second, no matter how many alternatives you have, your chosen alternative can be no better than the best of the lot. Thus the payoff from seeking good, new, creative alternatives can be extremely high.” (p. 47)
“Unfortunately, people don’t tend to think a lot about their decision alternatives. Just as they assume they know their objectives (even when they don’t), so they assume they know the options open to them. Too many decisions, as a result, are made from an overly narrow or poorly constructed set of alternatives. Although the common denominator in all these cases is lack of thought, the essential problem can take many forms.” (p. 47)
“One of the most common pitfalls is business as usual. Because many decision problems are similar to others that have come before, choosing the same alternative beckons as the easy course.” (p. 48)
“Many poor choices result from falling back on a default alternative.” (p. 48)
“Don’t just tweak the status quo. Step back and develop alternatives that reflect fresh thinking and different perspectives.” (p. 48)
“Choosing the first possible solution is another pitfall. Suppose you’ve recently moved and need to select a local physician. You ask a coworker for the name of her doctor, and you make an appointment. You embrace the first alternative—the easy choice. Although efficient, the process was not thorough and as a result could backfire. There’s nothing, after all, that says the easy choice will be the smart choice. The coworker’s doctor may be competent, but he may not have the communication skills, the hospital affiliation, the certification, the referral network, or the office hours that would best meet your needs. With a little extra effort, you would no doubt be able to find a doctor who met your criteria. Develop a new habit: once you find one possible solution, look further—generate new alternatives that could lead to a better solution.” (p. 49)”
“Choosing among alternatives presented by others can also result in a poor decision. You’re happily employed. Then one day the phone rings and a corporate recruiter makes you an attractive job offer with another company. What do most people do? They choose between the current job and the proposal, both of which have been shaped or presented by others. But if you are willing to consider leaving your current job, why not actively seek still other alternatives? Don’t get boxed in.” (p. 49)
“People who wait too long to make a decision risk being stuck with what’s left when they finally do choose. The best alternatives may no longer be available. If you delay choosing among vacation plans, for example, all the best flights may be full by the time you’re ready to make reservations. If you delay dealing with a health problem, your condition may have deteriorated so much by the time you act that your options are limited. Remember, get an early start on major decisions. Take charge.” (p. 49)
“Challenge constraints. Many decision problems have constraints that limit your alternatives. Some constraints are real, others are assumed.” (p. 50)
“Set high aspirations. One way to increase the chance of finding good, unconventional alternatives is to set targets that seem beyond reach.” (p. 51)
“Do your own thinking first. Before consulting others about alternatives, give your own mind free rein. Some of your most original ideas, born of innocence, may be suppressed if exposed to others’ ideas and judgments before they have been fully formed. Sometimes ignorance is bliss, so let loose your own creativity for a while. Once you buy into another person’s line of thinking, especially someone expert in the matter at hand, your own thoughts may be prematurely knocked out of the running.” (p. 52)
“Learn from experience. You shouldn’t let yourself be constrained by history, but you should certainly try to learn from it. Find out what others have done in similar situations, and if you’ve faced similar decisions before, consider again the alternatives you devised then.” (p. 52)
“Ask others for suggestions. After you’ve thought carefully about your decision and your alternatives on your own, you should then seek the input of others to get additional perspectives. People at a distance from a problem may see it more clearly, without the conceptual or emotional blocks that you may have. (See the career choice example below for an example of using advice to overcome constraints.) In seeking out advice, consider people in fields beyond the obvious.” (p. 53)
“Give your subconscious time to operate. How many times have you had a great idea while drifting off to sleep or taking a shower? Your subconscious had been turning over the problem, and a good idea bubbled up in a quiet moment. The subconscious needs time and stimulation to do this well. Start thinking about your decision problem as soon as possible; don’t put it off until the last minute. Once you’ve begun, make a point of thinking about the problem from time to time to give your subconscious a nudge. Your reward may well be a flash of insight. (Always write these insights down quickly when they occur; details are easily forgotten.)” (p. 54)
“Create alternatives first, evaluate them later. Creating good alternatives requires receptivity—a mind expansive, unrestrained, and open to ideas. One idea leads to another, and the more ideas you entertain, the more likely you are to find a good one. Bad ideas will almost certainly emerge along with good ones. That’s a necessary part of the process and something you shouldn’t be concerned about at this point.” (p. 55)
“Never stop looking for alternatives. As the decision process moves on to the consideration of consequences and tradeoffs, the evaluation stages, your decision problem will become increasingly clear and more precisely defined. Often, the evaluation will turn up shortcomings in your existing alternatives, which may in turn suggest better ones. Keep your mind and your eyes open.” (p. 55)

Consequences

“You’ve defined your problem, you’ve structured your objectives, and you’ve established the set of alternatives you have to choose from. Now, to make a smart choice, you need to compare the merits of the competing alternatives, assessing how well each satisfies your fundamental objectives. To make the comparisons, you’ll first need to describe how well you’ll fare with each alternative. In other words, you’ll need to lay out the consequences each alternative would have for each of your objectives. If you describe the consequences well, your decision will often be obvious— without requiring much further reflection.” (p. 65)
“This chapter presents a simple message: be sure you really understand the consequences of your alternatives before you make a choice. If you don’t, you surely will afterwards, and you may not be very happy with them. The main benefit to be derived from describing consequences is understanding. You will gain a better understanding not only of the consequences themselves, but also of your objectives and even of your decision problem. The more deeply you understand these, the more likely you are to make a smart choice.” (p. 65)
“Describing consequences isn’t as easy as it might at first appear. In fact, it can be downright difficult. If your descriptions are inaccurate, incomplete, or imprecise, the three biggest pitfalls, you risk making a poor choice.” (p. 66)

Build a Consequences Table

“The trick is to describe the consequences with enough precision to make a smart choice, but not to go into unnecessary and exhausting detail.” (p. 67)
“Step 1: Mentally put yourself into the future. Because the consequences of your decisions will occur in the future, often months or years from now, you need to shift your mindset ahead in time to uncover a decision’s true significance. As you think about each alternative, instead of imagining you might choose it, imagine that you have chosen it.

Imagine, for example, that you have remodeled your house following the plans just submitted by your architect. Ask yourself what life is like in the remodeled house. What is a typical weekday like? a weekend day? a summer day? a winter day? What’s it like when you have house guests? How are things different when your children are three years older? Putting yourself in the future will help you to focus on the longer-term consequences of a decision rather than just the immediate ones, and it will help you to view those consequences in their actual context.” (p. 67)
“Step 2: Create a free-form description of the consequences of each alternative. Write down each consequence using the words and numbers that best capture its key characteristics.” (p. 68)
Step 3: Eliminate any clearly inferior alternatives. “This step is a terrific time saver for many decisions because it can quickly eliminate alternatives and may lead to a resolution of your decision. You essentially play ‘‘king of the mountain,’’ trying to knock one alternative out with another.” (p. 68)
Step 4: Organize descriptions of remaining alternatives into a consequences table. Using pencil and paper or a computer spreadsheet, list your objectives down the left side of a page and your alternatives along the top. This will give you an empty matrix. In each box of the matrix, write a concise description of the consequence that the given alternative (indicated by the column) will have for the given objective (indicated by the row). You’ll likely describe some consequences quantitatively, using numbers, while expressing others in qualitative terms, using words. The important thing is to use consistent terminology in describing all the consequences for a given objective—in other words, use consistent terms across each row. Now, compare pairs of alternatives again, and eliminate any that are inferior.” (p. 69)

Example:

“As you can see, a consequences table puts a lot of information into a concise and orderly format which allows you to easily compare your alternatives, objective by objective. It gives you a clear framework for making comparisons and, if necessary, tradeoffs. Moreover, it imposes discipline, forcing you to bring together all your thinking about your alternatives, your objectives, and your consequences into a single, concise framework. Although this kind of table isn’t too hard to create, we’re always surprised at how rarely decision makers take the time to put down on paper all the elements of a complex decision. Without a consequences table, vital information can be overlooked and comparisons can be made haphazardly, leading to wrong-headed decisions.” (p. 71)
“Use experts wisely. Frequently, others—we’ll call them ‘‘experts’’—will know more about the possible consequences than you do. Accountants and tax attorneys can best assess the ramifications of putting investments in your name or your child’s name. And your nine-year-old may be the family expert on how much a particular birthday present would please an eight-year-old cousin.” (p. 74)
“When you seek out the judgment of others, be sure you understand not just the consequences they project but how they derived those consequences. You will want a full explanation of the underlying data, judgments, and logic. This explanation will be especially important for controversial decisions that you will need to explain or justify to family, colleagues, or others.” (p. 75)
“Too often, the terms used in describing consequences imply a level of precision that is higher or lower than is reasonable or useful. A rough cost estimate stated as ‘‘$33,475’’ implies too much precision in the scale. It would be more accurate if it were stated as ‘‘$33,000 ± 10 percent.’’ (p. 75)
“Address major uncertainty head on. For some consequences, you won’t be certain about what will happen. When the uncertainty is modest, you can usually define consequences using an estimate or a representative figure. When comparing new cars to buy, for example, you won’t know the actual prices until you negotiate a purchase, but a reasonable estimate will serve to narrow the field or even to make a choice. In this and in many other cases, the low uncertainty level will not influence the decision. For many other decisions, however, uncertainty may loom large enough to complicate your ability to describe consequences adequately. With decisions involving investments, insurance, or complex medical or legal matters, you will want to address the uncertainties explicitly—a topic we’ll address in Chapter 7.” (p. 76)

Tradeoffs

“At this point of the process, having compared the consequences of your alternatives, you will likely have eliminated some poor choices. Those that remain will seem to nearly balance each other: alternative A will be better than alternative B on some objectives, but worse on others. Important decisions usually have conflicting objectives—you can’t have your cake and eat it, too—and therefore you have to make tradeoffs. You need to give up something on one objective to achieve more in terms of another.” (p. 83)
“When you do have only one objective, your decision is straightforward. If you wanted to fly from New York to San Francisco as cheaply as possible, for example, you’d simply find the airline offering the lowest fare and buy a ticket. But having only one objective is a rare luxury. Usually, you’re pursuing many different objectives simultaneously. Yes, you want a low fare, but you also want a convenient departure time, a direct flight, and an airline with an outstanding safety record. And you’d also like to have an aisle seat and earn frequent flyer miles in one of your existing accounts. Now the decision is considerably more complicated. Because you can’t simultaneously fulfill all your objectives, you’re forced to seek a balance among them. You have to make tradeoffs.” (p. 84)
“Making wise tradeoffs is one of the most important and most difficult challenges in decision making. The more alternatives you’re considering and the more objectives you’re pursuing, the more tradeoffs you’ll need to make. The sheer volume of tradeoffs, though, isn’t what makes decision making so hard. It’s the fact that each objective has its own basis of comparison. For one objective you may compare the alternatives using precise numbers or percentages—34 percent, 38 percent, 53 percent. For another, you may need to make broad relational judgments—high, low, medium. For another, you may use purely descriptive terms— yellow, orange, blue. You’re not just trading off apples and oranges; you’re trading off apples and oranges and elephants.” (p. 84)

First eliminate dominated alternatives.

“The first step is to see if you can rule out some of your remaining alternatives before having to make tough tradeoffs. The fewer the alternatives, the fewer the tradeoffs you’ll need to make and the easier your decision will be. To identify alternatives that can be eliminated, follow this simple rule: if alternative A is better than alternative B on some objectives and no worse than B on all other objectives, B can be eliminated from consideration. In such cases, B is said to be dominated by A—it has disadvantages without any advantages.” (p. 85)
“To make it easier to uncover dominance, you should create a second table in which the descriptions of consequences are replaced with simple rankings.” (p. 86)

Try the even swap method.

“What is the even swap method? To explain the concept, we need to first state an obvious but fundamental tenet of decision making: if all alternatives are rated equally for a given objective—for example, all cost the same—then you can ignore that objective in choosing among those alternatives. If all airlines charge the same fare for the New York–San Francisco flight, then cost doesn’t matter. Your decision will hinge only on the remaining objectives.” (p. 90)

Example: Renting an office space.

Alan Miller is a computer scientist who started a technical consulting practice three years ago. For the first year he worked out of his home, but with his business growing he decided to sign a two-year lease on some space in the Pierpoint Office Park. Now that lease is about to expire. He needs to decide whether to renew it or move to a new location. After considerable thought about his business and its prospects, Alan defines five fundamental objectives for an office: short commuting time, good access to clients, good office services (clerical assistance, copy machines, faxes, mail service), sufficient space, and low cost. He surveys more than a dozen possible locations and, dismissing those that clearly fall short of his needs, settles on five viable alternatives: Parkway, Lombard, Baranov, Montana, and his current building, Pierpoint.” (p. 94).

“For some decisions, you yourself will be the source of much of the relevant information. If you are trading off vacation time and salary in choosing among job offers, only you know how you would spend a two-week versus a four-week vacation and the value of the difference to you. You should be as rigorous in thinking through your own judgments as you are in assessing objective data from outside sources. No matter how subjective a tradeoff, you never want to be guided by whim—think carefully about the value of each consequence to you.” (p. 102)

Uncertainty

“Because life is full of uncertainties, many of the decisions you make will involve calculated risks: investing in a mutual fund, accepting a blind date, deciding to have a child, asking for a raise or promotion, starting a business, launching a new product. You can’t snap your fingers and make the uncertainties go away. But you can raise the odds of making a good decision in uncertain situations. How? The first step is to acknowledge the existence of the uncertainties. Then you need to think them through systematically, understanding the various outcomes that might unfold, their likelihoods, and their impacts.” (p. 109)

Beware of outcome bias.

“A poor choice, a good consequence. Roberta Giles, an inexperienced investor, acts on a tip from an acquaintance and, without doing any research, invests in a venture to build a large apartment building. For the first few years after construction, the building reaches only 75 percent occupancy and runs deep in the red. But, just as bankruptcy seems inevitable, a large business unexpectedly moves into a nearby office park. Soon, the apartment building is full, with a waiting list for vacancies. Rents skyrocket. Three years later, Roberta sells out for four times her initial investment. Was the investment a smart choice? No! The decision making was terrible, even though the consequence was good. Would other decisions made the same way turn out as well? Extremely doubtful.” (p. 110)
“Decisions under uncertainty should be judged by the quality of the decision making, not by the quality of the consequences.” (p. 111)

“The best that O’Keeffe or any of us can do in making an important decision is to ensure we use a sound process that enables us to identify and think clearly about uncertainty. We can’t make uncertainty disappear, but we can address it explicitly in our decision-making process.” (p. 111)

Use risk profiles to simplify decisions involving uncertainty.

Uncertainty adds a new layer of complexity to decision making. A single decision may involve many different uncertainties, of varying levels of importance, and they may all interact, in tangled ways, to determine the ultimate consequences. To make sense of uncertainty, you need to find a way to simplify it—to isolate its elements and evaluate them one by one. You can do this by using risk profiles.” (p. 112)
“A risk profile captures the essential information about the way uncertainty affects an alternative. It answers four key questions:
What are the key uncertainties?
What are the possible outcomes of these uncertainties?
What are the chances of occurrence of each possible outcome?
What are the consequences of each outcome?” (p. 112)

Example:

Consider this simple example. Joe Lazzarino has kept his small consulting firm in business over the last five years by bidding on many small public and private engineering projects. His company consistently makes a modest profit, but Joe’s starting to get bored—he’s eager for new and bigger challenges. One day, he receives word that a government agency has issued a request for proposals for a large, multiyear contract. Joe sees that winning the contract would provide enormous benefits, but the huge costs associated with preparing a proposal could deplete his firm’s resources. And, of course, the agency’s response to his proposal is uncertain. He might be granted a full contract, a partial contract, or no contract at all.” (p. 112)
Joe creates a risk profile for the alternative of preparing and submitting a proposal. He succinctly describes the possible outcomes, their chances of occurring, and the associated consequences. He writes them up in a simple table, as shown below. Studying the risk profile, Joe sees a clear choice. Winning a partial contract (outcome B ) or a full contract (outcome C ) are much more likely outcomes than losing the bid altogether (outcome A), and both B and C would lead to consequences that are much more desirable than the current situation. Joe decides to go for it. (p. 112)

How to conduct a risk profile:

Identify the key uncertainties.

“Virtually any decision involves uncertainties, but most uncertainties don’t influence consequences enough to matter. Selecting the uncertainties important enough to include in a risk profile requires just two steps:
“List all the uncertainties that might significantly influence the consequences of any alternatives.”
“Consider these uncertainties one at a time and determine whether and to what degree their various possible outcomes might influence the decision. When there are many possible uncertainties, winnow them down to the few that are likely to matter most.” (p. 115)

Define outcomes:

“The possible outcomes of each uncertainty must now be specified. This requires answering two questions:”

“How many possible outcomes need to be defined to express the extent of each uncertainty?”

“How can each outcome best be defined?” (p. 116)
“When there are many possible outcomes, you should simplify your expression of them by organizing them into ranges, or categories. The categories can be either quantitative ($10,000 to $20,000, $20,000 to $30,000, and so on) or descriptive (high, medium, low; successful, unsuccessful, neutral). In some cases, it may be helpful to assign a representative value to a numerical range—for example, using $25,000 as a stand-in for the range $20,000 to $30,000—to make calculations and comparisons easier.” (p. 116)

Assign chances.

“Clearly defining the possible outcomes or categories of outcomes will help you in judging the chance, or likelihood, that each outcome will occur. Still, though, assigning chances can be one of the toughest and most nerve-wracking tasks in decision making, especially when you don’t know very much about the subject or when you’re under time pressure. But you can help ensure that your assessments are both reasonable and useful by following these suggestions:” (p. 117)
Use your judgment– “Often, you can make a reasonable assessment of the chances of a given outcome based on your own knowledge and experience. Oddsmakers do it all the time in sports betting. Friends do it when they arrange blind dates. We all do it almost unconsciously in daily life: What are the chances I’ll encounter delays on my homeward commute this Friday?” (p. 117)
Consult existing information– “There will often be information available that will help you assign chances to outcomes. You should carefully consider all the potential sources of information—libraries, the Internet, documents in your organization, research data, professional publications—that might shed light on the potential outcomes. Janet, for example, might get climatological data from the weather bureau to help her assess whether it will rain on a summer afternoon or evening.” (p.
Collect new data- “Sometimes the particular data you need may not be available off the shelf—you may need to collect them yourself. A food company might estimate the percentage of families who will buy a new brand of coffee by conducting a market trial or a telephone survey.” (p. 117)
Ask experts- “For most uncertainties, there will probably be someone out there who knows more about it than you do. Seek out an expert—your doctor, lawyer, or accountant, an economist—and elicit his or her judgment. In Janet’s case, a local meteorologist would be an appropriate expert.” (p. 118)
Break uncertainties into their components.– “Sometimes dividing an uncertainty into its components, thinking about the components, and then combining the results will help in establishing probabilities. An entrepreneur recognizes that the success of a new car wash in an area currently undergoing development will depend on the relative number of cars brought to the area by the different proposals for the adjoining site: a shopping mall or an office park. He can assign chances to various ranges of washes per day assuming the mall is built, and do likewise assuming the office park is constructed. He can then blend the results in proportion to the chances he assigns to the construction of a mall and of offices, to get an overall assessment of washes per day.” (p. 118)

People like to use terms, but if you use terms, people may missunderstand you.

When expressing chances, qualitative terms may come first to mind. In casual conversation, people often describe chances using phrases such as ‘‘unlikely,’’ ‘‘toss-up,’’ ‘‘barely possible,’’ ‘‘fairly likely,’’ ‘‘pretty good chance,’’ ‘‘almost sure,’’ and so on. They do this not only because it’s easy, but also because they think they’re really communicating their judgments about likelihood. But one person’s ‘‘fairly likely’’ may or may not be the same as the next person’s. Such subjective phrases may be sufficient for personal decisions that will not need to be justified to others, but they’re not precise enough for most decisions. In most cases, therefore, you will want to express chances quantitatively, as actual probabilities, using either a decimal (0.2) or a percentage (20 percent). Using numbers reduces the likelihood of miscommunication and sharpens decisions.” (p. 119)

Pinpoint precision is not required for probabilities.

“Pinpoint precision usually isn’t required in assigning chances. Frequently, knowing that a chance falls within a certain range is sufficient for guiding a decision. (See ‘‘Which Flight?’’ below.) If the estimated chance of some outcome falls between 30 percent and 50 percent, for example, compare the alternatives using 40 percent. Then reconsider them using 30 percent or 50 percent. More often than not, the change won’t matter; the decision will remain the same.” (p. 120)

How can you get other people to express probabilities?

“If you are having trouble expressing your judgment quantitatively, or getting someone else to do so, zero in from the extremes. If you ask the hostess at a busy, no-reservations restaurant the chances of getting seated at 5:30 P.M. on Thursday, she might respond, ‘‘I haven’t a clue; either you will or you won’t.’’ (Ah, frustration!) Countering with the question, ‘‘Is the chance better than 25 percent?’’ will very often elicit something more useful: ‘‘Oh, much more than that.’’ ‘‘More than 50 percent?’’ ‘‘Yes.’’ ‘‘As much as 90 percent?’’ ‘‘Too high.’’ The range has been narrowed to between 50 percent and 90 percent;” (p. 119)
“Karen and Jane now call on Sam’s expertise to quantify the likelihood that Karen will win the trial. Sam has told Karen that she has a ‘‘pretty good’’ chance of winning, based on the outcomes of similar cases, the record of the judge, and his assessment of his own litigation skills. Jane probes the meaning of ‘‘pretty good,’’ trying to arrive at a hard number, which would sharpen the analysis. She asks Sam, ‘‘How would you translate ‘pretty good’ into a probability?’’ ‘‘I just don’t think that way,’’ Sam answers. ‘‘I don’t see how you can put a number on everything, especially things as subjective as winning a trial.’’ Jane turns to Karen. ‘‘How do you interpret that, Karen? Give me some number.’’ ‘‘Oh, I’d say that Sam thinks our chance of winning is around 20 or 30 percent.’’ Sam protests. ‘‘That’s not what I said! When I say a pretty good chance, I mean something more than that!’’ ‘‘How much more? More than 50-50?’’ ‘‘Certainly. More than 50 percent.’’ ‘‘How much more?’’ ‘‘Oh, I don’t know that you can put a precise number on it. It certainly isn’t as high as 90 percent. In jury trials you can never be that sure. It’s maybe somewhere between 60 and 80 percent.’’ ‘‘Would you say that 70 percent is reasonable, or high, or low?’’ ‘‘It’s a good estimate, as close as we can get.’’ (p. 128)

Use decision trees.

“Some decisions, particularly highly complex ones, will require further analysis. That’s when a decision tree can be extremely useful. A decision tree provides a graphical representation—a picture—of the essence of a decision, displaying all the interrelationships among choices and uncertainties. In one sense, a decision tree is like a blueprint—it lays out, methodically and objectively, the architecture of a decision. And just as a builder would not set out to construct a house without a blueprint, a decision maker will often require a decision tree to resolve a tough choice under uncertain conditions.” (p. 123)
“Decision trees are especially useful for explaining decision processes to others. (Hence the careful numbering of the branching points and the labeling of the branches.) Getting into the habit of sketching decision trees, even for relatively simple decisions involving uncertainty, can enhance your decision-making skills in two ways. First, decision trees encourage thorough, logical thinking about a problem—a useful habit to cultivate. Second, mastering the mechanical skill of tree construction on simple problems will make it easier to use the technique for more complex ones,” (p. 125)

Example 1:

“This simple decision tree, with its four possible paths, shows how pictures can clarify the relationships among alternatives, uncertainties, and consequences. It brings risk profiles to life. Seeing her decision presented this way immediately sharpens Janet’s thinking. She concludes that a successful picnic would meet her objectives so much better than would the dinner dance that it is worth taking a 30 percent chance on rain. She opts for the picnic.” (p. 125)

Example 2:

Jane summarizes. ‘‘If you go to trial and lose—not the most likely outcome, but it has a chance of 30 percent—your life would be pretty bad. You’d be in debt; you couldn’t afford some of the things that would make you happier; you’d have to remain in your present job and keep your present apartment.’’ Karen interrupts. ‘‘Not to mention the humiliation of losing and my regret over not accepting the sure thing of $210,000. I’m in pretty bad shape now, but I’d be far worse off if I lost the trial.’’ ‘‘But who says you’re going to lose the trial?’’ Sam barks. Jane continues: ‘‘If you netted a lot more money from the trial, what would you do with it? How would it change your life? How much happier would you be?’’ ‘‘If I had a lot more money, I’d still do all the things I said I’d do if I had the $210,000. But I’d get a condo rather than go on renting, I’d buy a new car instead of a used one, and maybe I’d buy some clothes and take a few trips to Europe and other places. And I’d definitely go to graduate school. But those things aren’t nearly as important to me as what that initial $210,000 would bring.’’ ‘‘How much more money above the first $210,000 would give you roughly the same satisfaction it would?’’ ‘‘Close to a million! At least $800,000.’’ Sam couldn’t contain himself. ‘‘You can’t be serious, Karen! You can’t equate having only about $200,000 with having another $800,000!’’ ‘‘Yes, I am serious. Without the $210,000, I’m ruined. More would make me richer, but that’s not as important to me as getting an even start.” (p. 160)

“Sam’s sharp disagreement with Karen about whether to accept the $300,000 offer reflected a correspondingly sharp difference in risk tolerance. (They agree on probabilities; after all, Sam was the source of these judgments.) With Karen’s risk tolerance, settling was the smart choice, but with Sam’s, settling was foolishly conservative. It is good to have our advisors challenge our thinking on risk tolerance (as Sam did), but in the final analysis, it’s our own (or, in this case, Karen’s) risk attitude that matters in making a decision. You should certainly seek out information and guidance from informed advisors, but you should never let them make a decision for you. Sam’s recommendation to go to court was incompatible with Karen’s risk tolerance.” (p. 162)

Risk tolerance

“A person’s attitude towards risk is as individual as his or her personality. Some people avoid risk at all costs—they put all their retirement savings into certificates of deposit insured by the federal government. Others embrace risk—they invest all their money in options, in penny stocks, in junk bonds. Most of us fall somewhere in between. We take on some degree of risk, knowing that it goes hand in hand with reward, but not so much that we can’t sleep at night.” (p. 135)

Example 1:

“The essence of Rob’s decision is that the surgery alternative offers him a 90 percent chance of restoring his vision, but a 10 percent chance of permanently worsening it. Clear enough? Yes. And yet so difficult. Should he take his chances on the surgery or play it safe with the status quo? What would you decide? The smart choice for one person may not be the smart choice for another. You might decide not to have the surgery, but your next-door neighbor might opt for it. It all depends on one’s attitude toward risk.” (p. 137)
“Rob believes that restoring 20/30 vision without fuzziness would make a huge difference to him. He could resume driving at night, and tennis and traveling—two of his favorite pastimes—would become much easier. And although dropping to 20/100 would be bad—no question about it—he feels he has already made so many adjustments to weakened vision that it wouldn’t be the end of the world. He therefore decides that, in terms of desirability, the negative consequence of deteriorated vision only slightly outweighs the positive consequence of improved vision.” (p. 139)
“Your risk tolerance expresses your willingness to take risk in your quest for better consequences—in Rob’s case, better vision. It depends primarily on how significant you consider the downside— the poorer consequences of any decision—compared to the upside. If, like most people, you are risk averse, the poorer consequences will weigh more heavily in your mind than the better ones. The more heavily they weigh, the more risk averse you are. Thus, to reflect your risk tolerance in a decision you need to think carefully about how desirable you consider the possible consequences relative to one another.” (p. 137)

Quantify risk tolerance with desirability scoring

“Assign desirability scores to all consequences. You begin by comparing the consequences and ranking them from best to worst. You assign the score of 100 to the best and 0 to the worst consequence. Then you assign a score to each of the remaining consequences that reflects its relative desirability. If, for example, you conclude that the desirability of a consequence is exactly halfway between that of the best and worst consequences, you’d assign it a score of 50. Check to be sure that all your scores are consistent, and adjust them as needed to reflect your true feelings about their respective consequences.” (p. 141)
“Now, to determine a consequence’s contribution to the alternative’s desirability, multiply its associated outcome’s probability by its desirability score assigned in the first step. If your best consequence (desirability score of 100) had an outcome probability of 30 percent (0.3), its contribution would be 30 (i.e., 100 × 0.3 = 30). When an alternative results in a sure thing, its outcome has a probability of 1.0, and the contribution of its consequence will equal its desirability score.” (p. 141)
“Going through the process of assigning desirability scores to consequences and calculating overall desirability scores for alternatives won’t be necessary for most decisions. But for resolving some of life’s most important and most complex decisions, it can be invaluable.” (p. 142)

Linked decisions

“Many important decision problems require you to select now among alternatives that will greatly influence your decisions in the future. Your choice of a college major, for example, may strongly influence your future career options. Such decisions are linked decisions—to make the smartest choice about what to do now, you need to think about what you might decide to do in the future.” (p. 163)
“The kinds of decisions we want to talk about here involve a necessary connection between the current decision and one or more later ones. A doctor initiating treatment on a critically ill patient, for example, has to think about how to respond to possible complications and how the current treatment may open or foreclose alternative treatments in the future.” (p. 163)
“In such linked decisions, the alternative selected today creates the alternatives available tomorrow and affects the relative desirability of those future alternatives. Linked decisions can be years apart, as with the choice of a college major and the subsequent choice of a career. Or they can be minutes apart, as with a series of choices about which route to take when driving to work during rush hour. In all cases, though, they add a new layer of complexity to decision making.” (p. 163)
“The essence of making smart linked decisions is planning ahead. Makers of effective linked decisions, like successful chess players, plan a few decisions ahead before making their current decision. After making a basic decision (your move as a chess player) and noting developments (your opponent’s move, which resolves the pending uncertainty), the decision maker again plans a few decisions ahead before making the next choice. Continuing to do this, step by step, moves the series of decisions toward the fulfillment of the decision maker’s objectives.” (p. 167)
“To create information-gathering strategies, you need to decide what information is important and how to gather it: •For each critical uncertainty, list the kinds of information that could reduce your uncertainty, and then determine how your view of the decision might change in the face of the new information. The politician, for example, could reduce his uncertainty about his support if he had clear data about his name recognition and his standing among voters. If fewer than half of the voters recognized his name and, of those, fewer than half viewed him favorably, he might conclude that his chances of winning were poor and reverse his tentative decision to run. •Think about ways to obtain the important information. To collect information on voter attitudes, the politician could conduct a telephone poll or a series of focus groups.” (p. 169)
“Sometimes uncertainty is so great and the present environment so changeable that it is difficult to plan future decisions with confidence. Emergency room doctors, firefighters, newsroom editors, and business managers are among those who often find themselves in such fast-developing situations. In these cases, you should consider developing flexible plans that allow you to make the most of whatever circumstances arise. Flexible plans keep your options open. They can take a number of forms:” (p. 173)
All-weather plans.- “Like all-weather tires, all-weather plans work well in most situations, but they are seldom the optimal choice for any one situation. They represent a compromise strategy. In highly volatile situations, where the risk of outright failure is great, an all-purpose plan is often the safest plan.”
Short-cycle plans.- “With this strategy, you make the best possible choice at the outset, then reassess that choice often. Business managers do this when they develop a one-year plan but update it quarterly, taking into account business developments in the interim.”
Option wideners.- “Sometimes the best plan is to act in a way that expands your set of future alternatives. If a computer manufacturer had only one chip supplier, for example, it might consider widening its supplier list, purchasing, say, 90 percent of its chips from its regular source and 5 percent from each of two new sources. Then, if the established supply line were interrupted, alternatives could be developed sooner. It might cost the manufacturer a little more to buy from three vendors, but in the long run it could save the company’s business.”
Be prepared’’ plans.– “These backup plans stress preparedness—having a reasonable response available for most contingencies. Many people, for example, keep a first aid kit and basic medications in the medicine cabinet for emergencies and a bottle of wine or a pitcher of iced tea in the refrigerator in case friends drop by. As the old expression has it, ‘‘Success is what happens when preparation meets opportunity.’’

Key takeaways from “Smart Choices”

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