From Howard Raiffa “Smart Choices”
How Do You Deal With Uncertainty?
“Decisions under uncertainty should be judged by the quality of the decision making, not by the quality of the consequences.” (p. 111)
“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.
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)
How Do you Figure Out the Probabilities?
- “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?”
- “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.”
- “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.”
- “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.”
- “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.” (p. 118)
“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, such as the one illustrated in the following application.” (p. 125)
