How to Choose the Appropriate Decision-making Method

Decision-making and Valuation

Best Practices
Anneke Zwart
Student (University), Netherlands

How to Choose the Appropriate Decision-making Method

Most decision makers in organizations rely on conventional decision-making tools - even in situations of high complexity and uncertainty. However, these basic tools are based upon the assumption that decision makers have access to all information that is needed. Therefore, these conventional tools can only work in stable contexts.
See also the Cynefin Framework or Taleb's 4 Quadrants to appreciate the difference between these decision-making circumstances/contexts: in uncertain and complex environments the conventional tools are useless, mainly because of the lack of reliable and complete information.
The problem with the above is not the absence of alternative tools; rather, it is the lack of clear guidance about how and when to use what tools. As a result, managers will use only those tools that they are highly familiar with, instead of using the most appropriate tools.

Courtney et al. (2013) explain a model of decision making that matches the right tools to the decisions to be made. Their model is based on three factors: an understanding of the factors that will lead to success; the predictability of outcomes; and the degree of centralization of information.

So what do you need to do as a decision-maker?

You need to start with asking 2 questions to analyze the context and find the appropriate tools in that particular context:
1. Do I have a clear understanding of the factors and conditions that are needed for a successful result? In other words is there a "strong causal model", in which the combination of Critical Success Factors (CSFs) and economic situations that lead to success are clearly understood.
2. Are the possible outcomes of a certain decision predictable? In order to determine which tools are appropriate, it is critical to know whether predicting the outcomes resulting from a certain decision is possible.

According to the authors, answering the first two factors/questions will direct you to the most appropriate kind of decision making tool, which could be Conventional Capital Budgeting Tools, Quantitative Multiple Scenario Tools, Qualitative Scenario Analysis, Case-Based Decision Analysis.

And what should you do next?

The third factor – the degree of centralization of information – has to do with choosing the right Information Aggregation tools. Such tools deal with capturing dispersed information and operate independently from the decision making tools. The related question is the following:
3. Is the information that you need centralized or decentralized?

Standard aggregation tools have been used for a long time, but nowadays also newer tools for aggregating dispersed information are used:
- One example is the use of information markets to obtain the knowledge of informed crowds with regard to important variables such as macroeconomic outcomes.
- Another example is called similarity-based forecasting. This approach asks individuals to rate the similarity between a certain decision to a past decision.
- The last example mentioned is incentivized estimation. In this approach certain people are estimating an important outcome; the person that most accurately estimates the outcome will receive a payoff.

Complications...

This model of choosing the right decision making tools is highly simplified. In reality there will be many kinds of complications and problems when important decisions are made. Some of the most important complications in selecting the right decision making tools are the following:
1. Cognitive limitations and behavioral biases: It is simply impossible for human beings to always accurately predict the level of uncertainty. This might us lead to say that the above proposed model is not very practical. However, it is argued that these biases can be managed by choosing the decision-making tool in a systematic, transparent, public way in which peers are able to assess the decisions that are made.
2. Problematic organizational protocols: Because of the influence that money and power have on decision making behavior, organizations are required to establish some general decision making protocols. These protocols often get in the way of using the most appropriate decision making tool.
3. Reliance on one tool: Although decision makers often rely on one specific decision making tool, it is often more efficient to use more than one tool and combine certain tools.
4. The time/timing of the decision: Besides considering what decision to make, it is important to consider when to make the decision as well. Sometimes it is more efficient to delay a certain decision rather than making the expensive and high-risk decision directly.

Source: Courtney, H., Lovallo, D., and Clarke, C. (2013) “Deciding How to Decide” HBR November 2013 pp 62-70

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👀How to Choose the Appropriate Decision-making Method

Decision-making and Valuation



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