All 2 entries tagged Decision
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March 10, 2016
Coming towards the end of two intense weeks on successfully completing in-module work on making a decision on which location to set up a production facility and a marketing campaign for a new product, I realised how useful decision making tools and techniques are in making a sound, rational and logical final decision. These tools and techniques still rely on individual judgements and perceptions, but provide a more structured backbone to how we arrive at a particular decision; they provide a means for having data to back up the decision made. The first step is to always weight out the benefits and limitations of using specific decision making tools, and then find the simplest form that would help you arrive at a robust decision.
Having briefly scanned when best to use decision making tools, we, as a team, started to analysing the question being asked using a Decision Tree - this provided an overview of the question at hand. This also served as a project timeline, as it involves forecasting a few years into the future. Having prepared a discounted cash flow analysis, we were able to add a quantitative net present value function to each case possible. First glance at the tree showed Lymington to provide the most effective financial benefit, which in my opinion, is the ONLY justification that shareholders need (in most cases) in order to make a decision in the real world today. I took the initiative here to back up this decision by performing a basic market risk analysis - which showed that it was high risk to choose this option in a time where commercial industrial properties are in decline, and demand is increasing. This also showed me, and our team, how useful working in a team to make a decision is. It is easy to utilise the best skills and attributes of each individual - but care must be given that over-confidence bias does not affect the outcome. Working in a team also reduces individual bias, and assumption from our intuition which sometimes make us believe that we know something, when in reality, given the context and situation, it is not valid.
A SWOT and PESTLE analysis was also used to provide an overview of the situation, helping us better understand the strengths, weaknesses, threats and opportunities of the locations. This identified further areas of the market which we would not necessarily have known from our intuition. Here, it showed the importance of working as a team, because this market research was also useful for deciding which marketing campaign to decide on - it prevented duplication of resource and time used as it was done only once. In a real life situation, this could be considered as inter-departmental collaboration.
We then chose to test our own abilities by attempting to use the SMART methodology. Once again, the ratings and rankings done using this tool are down to personal judgement, but SMART provides a systematic means of concluding in one decision. This process relied on individual ability to be able to make a decision, make a weighted preference of one option over another, and ensure that transitivity is maintained. With only two options, this was fairly easy to carry out, but the complexity of being able to decide and maintain all the axioms when there are hundreds of alternatives must be appreciated. Even at the end of this, the final choice still is based on personal judgement and priority of what the main decision maker wants. The SMART tool concludes with an Efficient Frontier being tabulated; this can then help make a more robust decision with reference to the value of benefits achievable to the cost of that option.
Sometimes, it is useful to justify the outcome of having used one decision making tool by using another one; for our case we chose to understand AHP. This was done in a similar way, based on values set by the decision team. What I learnt most from this was that in many cases, it is important to analyse any data that is given to you before proceeding to carry out any process. The data provided to us had several inaccuracies, or was perhaps out of date. It is absolutely vital, to have evidence to back up any claims that you make. This can help when trying to find out where we went wrong in the process, or can help us learn in the future in case the decision worked out for the worse. Again, it must be appreciated that the decision is not bad or good based on the outcome, but the way in which the decision making process was carried out.
For marketing, we chose to use the GRID analysis matrix, in order to simplify the process. This showed our ability to understand that the most effective way of carrying out a robust decision making process is to use the simplest tool available to come up with a robust decision. Choosing which one is most appropriate is key in time bound decisions.
All in all, I had confidence that I could make decision very easily, having a personality which satisfies axioms such as decidability and transitivity. Due to my strong personality, I should be aware of biases that arise because of this. It is usually wrong to assume that something is the way it is, without having the base knowledge to be able to back that claim. It is also incorrect then to fall into the confirmation trap, to seek evidence to back up what I believe is correct, as in most cases, there will also be evidence that disproves my claim. Bias also from recency should be avoided - this is the bias that comes from having come into contact with knowledge recently.
March 05, 2016
Businesses worldwide are constantly in positions where they have to make decisions, be it strategic, tactical or operational. Everyday, we too make several choices, most of which are without consciously thinking about the decisions we are making. This is down to our own intuition, which is our System 1 of our cognitive intellectual functioning, as represented by Daniel Kahneman. His idea suggests that it is this intuitive, automatic System 1 response that is really the more influential; it guides System 2 thinking - the slower, more analytical mind, governed through reasoning. The mind works in mysterious ways, and it is thus absolutely essential to be able to control when we choose to use our different systems. We should not use our System 2 when we don’t need to, as this can take lots more time and effort; we should not solely rely on our System 1 as this system is based on the power of our emotional senses and can therefore be easily fooled and tricked (just as with the fact that we, as the human race, manage to associate faces and other patterns to situations when they aren’t actually there). We should hence be able to know when to switch on our System 2 to guide and support our System 1, and when to switch in back off again. This theory is not limited to being beneficial in business contexts, but also to our individual personal lives.
System 1 thinking is embedded within our day-to-day lives through all our past experiences, and is therefore sufficient for most decisions in our lives. System 2 takes a lot more effort and time, with a larger variety of considerations to be taken into account; it should therefore be used for more complex important decisions. Our system 1 is susceptive to making biased judgements, down to four main heuristics - representativeness, recognition/availability, anchoring and adjustment, and affect. Having done the judgement test provided during the module, I learnt that I am efficient at using my System 2, especially in situations that involve calculations, probabilities and numerical analysis, perhaps due to my engineering background. However, care should be given with regards to over-confidence in ability, as well as not treating events as independent. The most valuable lesson for myself here was to treat events independently, and not to practice what I term as the ‘concurrent engineering’ approach, where I try and find links between things that don’t necessarily exist. Going through other biases, the heuristic that caught my attention the most, as it applied to what I have been doing my whole life is ‘anchoring’. Many of my friends would agree to the fact that I am very good at bargaining, as would come with my ethnical stereotype. When a seller tries to ‘anchor’ me or prime me to a specific value, I am not moved. I usually have an idea of the price I am willing to pay for something, done through research in most cases. I also then try and obtain the most value possible, by going completely out of range of what the seller usually expects, finally being able to meet close to the middle at a much better price than I would ever have paid; essentially forcing the seller to sell. This technique of priming is used very widely in the sales field, and the greatest learning to me is to pay very close attention to some of these ‘scam’ techniques.
Overall, it is common terminology to state that people make a good or bad decision. However, these should not be governed or be related to the outcomes of the decision, but on the processes used to come up with that decision. Through what I, together with my colleagues, have learned is that human judgement is on the whole quite poor. There is vast research into the human mind, and as a result, several robust decision making tools and methodologies have emerged to help eliminate or at least reduce how weak our decision making skills are. I didn’t know that I had already been practicing some of these techniques, or that they actually had guided methodologies, during my previous education and experience. I am an experienced user of Computational Fluid Dynamics software like Star-CCM+, a simulation tool. When modelling, each event is treated independently, and several hundred external factors taken into consideration. This is very complex, and actually put into perspective how hard it is to make a decision had I not been able to account for all these inputs. I hence believe that simulation is a very powerful set of algorithms and calculations that can help relieve the stress it would place on the human mind if a person was to carry out all these calculations by themselves. Another example I have used before in making decisions is CAE and FEA (Finite Element Analysis) - another modelling tool that helps a designer decide what the optimal design situation is. The two mentioned are very complex System 2 integrations, and are not for use by amateurs. There are more simple methods such as grid analysis, decision trees, SMART and AHP, which I believe can be used by anyone and everyone. The use of matrices has shown to be a common feature in some of these methods, demonstrating some of the qualities necessary in order for decisions to be made, such as being able to clearly decide between two options and ranking options in order of preference. After briefly touching these tools, I can see how most of the tools and techniques are useful for presenting ideas in a logical structure, adding to basic System 1 findings and knowledge with factual data. Most importantly in the business context, choosing the correct one or integrating the relevant ones can save a lot of time and reduce costs.