{"id":322,"date":"2009-01-18T13:54:14","date_gmt":"2009-01-18T13:54:14","guid":{"rendered":"http:\/\/meeseeks:5080\/blog\/?p=322"},"modified":"2009-01-18T13:54:14","modified_gmt":"2009-01-18T13:54:14","slug":"retroflexive-decision-making","status":"publish","type":"post","link":"https:\/\/vukutu.com\/blog\/2009\/01\/retroflexive-decision-making\/","title":{"rendered":"Retroflexive decision-making"},"content":{"rendered":"

How do companies make major decisions?\u00a0 The gurus of classical Decision Theory – people like economist Jimmie Savage and statistician Dennis Lindley – tell us that there is only one correct way to make decisions:\u00a0 List all the possible actions, list the\u00a0potential consequences of each action, assign utilities\u00a0 and probabilities of occurrence to each consequence,\u00a0multiply these numbers together for each consequence and then add the resulting products for each action to get an expected utility for each action, and finally choose that action which maximizes expected\u00a0utility.
\nThere are many, many problems with this model, not least that it is not what companies – or intelligent, purposive\u00a0individuals for that matter – actually do.\u00a0 Those who have worked in companies know that nothing so simplistic or static\u00a0describes intelligent, rational decision making, nor should it.\u00a0 Moreover, that their model\u00a0was flawed as a description of reality was known at the time to\u00a0Savage, Lindley, et\u00a0al<\/em>,\u00a0\u00a0because it was pointed out to them six decades ago by people such as George Shackle, an economist who had actually worked in industry and who drew on his experience.\u00a0 The mute, autistic behemoth that is mathematical economics, however, does not stop or change direction merely because its utter disconnection with empirical reality is noticed by someone, and so –\u00a0TO THIS VERY DAY – students in business schools still learn the classical theory.\u00a0 I guess for the students it’s a case of: \u00a0Who are\u00a0we going to believe – our textbooks, or\u00a0our own\u00a0eyes?\u00a0\u00a0\u00a0 <\/em>From my first year as an undergraduate taking Economics 101, I had trouble believing my textbooks.
\nSo what might be a better model of decision-making?\u00a0 First, we need to recognize that corporate decision-making is almost always something dynamic<\/a>, not static – it takes place over time,\u00a0not in a single stage of analysis, and\u00a0we would do better to describe a process, rather than just giving a formula for calculating an outcome.\u00a0\u00a0 Second, precisely because the process is dynamic, many of the inputs assumed by the classical model do not exist, or are not known to the participants, at the start, but emerge in the course of the decision-making process.\u00a0\u00a0 Here, I mean things such as:\u00a0 possible actions, potential consequences, preferences (or utilities), and measures of uncertainty (which may or may not include probabilities).\u00a0\u00a0\u00a0\u00a0\u00a0Third, in large organizations, decision-making is a group activity, with inputs and comments\u00a0from many people.\u00a0\u00a0 If you believe – as Savage and Lindley did – that there is only one correct way to make a decision, then your model would contain no scope for subjective inputs or stakeholder revisions, which is yet another of the many failings of the classical model.\u00a0\u00a0\u00a0 Fourth, in the real world, people need to consider – and do consider – the potential downsides\u00a0as well as the upsides of an action, and they need to do this – and they do do this – separately, not merged into a summary statistic such as “utility”.\u00a0\u00a0 So, if \u00a0one possible consequence of an action-option is catastrophic loss, then no amount of maximum-expected-utility quantitative summary gibberish should permit a rational decision-maker to choose that option without great pause (or insurance).\u00a0\u00a0 Shackle knew this, so his model considers downsides as well as upsides.\u00a0\u00a0 That Savage and his pals ignored this one can only assume is the result of the impossibility of catastrophic loss ever occurring to a tenured academic.
\nSo let us try to articulate a staged process for what companies actually do when they make major decisions, such as major investments or new business planning:<\/p>\n

    \n
  1. Describe the present situation and the way or ways it may evolve in the future.\u00a0 We call these different future paths scenarios<\/em>.\u00a0\u00a0 Making assumptions about the present and the future is also called taking a view<\/em>.<\/li>\n
  2. For each scenario, identify a list of possible actions, able to be executed under the scenario.<\/li>\n
  3. For each scenario and action, identify the possible upsides and downsides.<\/li>\n
  4. Some actions under some scenarios will have attractive upsides.\u00a0\u00a0 What can be done to increase the likelihood of these upsides occurring?\u00a0 What can be done to make them even more attractive?<\/li>\n
  5. Some actions under some scenarios will have unattractive downsides.\u00a0\u00a0 What can be done to eliminate these downsides altogether or to decrease their likelihood of occurring?\u00a0\u00a0 What can be done to ameliorate, to mitigate, to distribute to others, or to postpone the effects of these downsides?<\/li>\n
  6. In the light of what was learned in doing steps 1-5, go back to step 1 and repeat it.<\/li>\n
  7. In the light of what was learned in doing steps 1-6, go back to step\u00a02 and repeat steps 2-5.\u00a0 For example, by modifying or combining actions, it may be possible to shift attractive upsides or unattractive downsides from one action to another.<\/li>\n
  8. As new information comes to hand, occasionally repeat step 1. Repeat step 7\u00a0as often as time permits.<\/li>\n<\/ol>\n

    This decision process will be familiar to anyone who has prepared a business plan for a new venture, either for personal investment, or for financial investors and bankers, or for business partners.\u00a0\u00a0 Having access to spreadsheet software such as Lotus 1-2-3 or Microsoft EXCEL has certainly made this process easier to undertake.\u00a0\u00a0But, contrary to the beliefs of many, people made major decisions before the invention of spreadsheets, and they did so using processes similar to this, as Shackle’s work evidences.
    \nBecause this model involves revision of initial ideas in repeated stages, it\u00a0bears some resemblance to the retroflexive argumentation theory of philosopher Harald Wohlrapp.\u00a0 Hence, I call it\u00a0Retroflexive Decision Theory<\/em>.\u00a0 I will explore this model in more detail in future posts.
    \nReferences:<\/em>
    \nD. Lindley [1985]:\u00a0 Making Decisions<\/em>.\u00a0 Second Edition. London, UK: John Wiley and Sons.
    \nL. J. Savage [1950]: The Foundations of Statistics<\/em>.\u00a0 New York, NY, USA:\u00a0 Wiley.
    \nG. L. S. Shackle [1961]: Decision, Order and Time in Human Affairs<\/em>. Cambridge, UK:\u00a0 Cambridge University Press.
    \nH. Wohlrapp [1998]:\u00a0 A new light on non-deductive argumentation schemes. \u00a0Argumentation<\/em>, 12: 341-350.<\/p>\n","protected":false},"excerpt":{"rendered":"

    How do companies make major decisions?\u00a0 The gurus of classical Decision Theory – people like economist Jimmie Savage and statistician Dennis Lindley – tell us that there is only one correct way to make decisions:\u00a0 List all the possible actions, list the\u00a0potential consequences of each action, assign utilities\u00a0 and probabilities of occurrence to each consequence,\u00a0multiply […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[19,23,25,86,82],"tags":[],"class_list":["post-322","post","type-post","status-publish","format-standard","hentry","category-corporate-culture","category-decision-theory","category-economics","category-probability-theory","category-uncertainty","p1","y2009","m01","d18","h13"],"_links":{"self":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts\/322","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/comments?post=322"}],"version-history":[{"count":0,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts\/322\/revisions"}],"wp:attachment":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/media?parent=322"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/categories?post=322"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/tags?post=322"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}