Make Up Your Mind (Chapter 2)

I have quite a number of books in my library, virtually all of them non-fiction. I'm starting to think there's not enough time to read them all. Skimming each one doesn't really help me absorb them, so I thought it might be interesting to explore the books by reading Chapter 2 of each.

Today's book is Make Up Your Mind, by Hal Mooz. The author is well-known in the Systems Engineering community as co-author of Visualizing Project Management, and Communicating Project Management.

Chapter 2 of this book is "Decision Fundamentals for Thinking Clearly". It's a short chapter and touches very briefly several topics relevant to thinking clearly.

We get a reminder that decision rigor is 'driven by the fear of a negative outcome'. This is something we all instinctly already know. We become more anxious when the decision has serious consequences (eg, which univerisity to go to), and are rightly less rigorous when the consequences are not serious (eg, what to have for lunch).

An interesting paragraph is on when do we actually 'make' a decision? Does deciding one way or another constitute making the decision or is further action required?  Some decision experts say you make the decision when you irrevocably allocate resources. (I had not heard of this before.  I think it's a good criteria). The author argues against it because it fails in some cases. His example is the decision to lose weight and deciding to eat less. Contrary to this criteria, the decider has actually decided NOT to allocate resources (food).

The author defines a good decision as 'applying informed judgment based on relevant facts and quality ethics to select an alternative and act on it'.

A short paragraph reminds us that the outcome does not define whether a decision is good or not. This is pretty much an obligatory topic in any decision making text.  Another paragraph covers another obligatory topic -- the fallacy of sunk costs.

Mooz introduces a concept new to me: 'Cost / Price of Indifference'. It is the purchase price at which you don't care (emotionally) whether you get the goods or not. He suggests this is a time saving concept when purchasing or selling anything. Rather than agonising hours and hours over how much to bid, just bid at this price.  He did not discuss this in the context of buying stock market shares. I think that will be interesting to consider. 

There are two stages to decision-making. The first is Decision Preparation. This is about getting the decision statement right, setting up the decision type frame, and the decision solution frame correct.  The second stage Deciding, which is about the act of selecting from the alternatives that were set up in the decision solution frame.  (The author didn't mention this, but I recognise this 2-stage framework as  classically systems engineering).

Other short topics covered is the decision maker's viewpoint, decision fitness, and decision fatigue. Decision Fitness is another concept I had not heard of before. This is a concept about the fitness of the person making the decision. They must be proficient at the following skills:

• Specifying the decision and context
• Determining the decision type
• Creating the decision type frame
• Developing the decision solution frame
• Creating viable alternatives
• Identifying and geting the comparative information
• Knowledgeably selecting the right judgment basis
• Skillfully applying the appropriate judgement process

A quick glance at the table of contents reveals many of these topics are covered in the rest of the book. 

This is a short book. At only 166 pages and with larger than normal font, it is misleadingly light-looking. Judging from the concepts introduced in the Chapter 2, it seems like a concept-heavy, deeply useful text.  Just considering the list of skills listed in order to be 'decision fit' shows you how much is required to be a good decision maker.  I'm not sure this thin book will be able to cover what is required to be decision fit, but if it gives exposure and awareness of the concepts, it will be worth further study. 

When to trust your gut

Alden Hayashi, Harvard Business Review

Summary:

Many decision situations do not lend themselves to quantitative analysis.  For one thing, the situation may be so complex that quantitative analysis simply cannot be applied. Examples include areas in public relations, which person to hire, research, marketing, and strategy.

In other cases there just is not enough data to perform quantitative analysis.

Even if data could eventually become available, there are times when decisions have to be made quickly, or else the opportunity is gone. There is no time to gather and analyse data in a systematic and rational manner. Situations like this can be expected to become more common in today’s increasingly turbulent and globalized economy, where things can change at the drop of a hat.

Executives in the strategic positions of organisations often face these types of situations.  They have to rely on gut instinct to make their decisions.  Although in some cases they are provided the results of quantitative analysis, the numbers are often biased to show why something is a good thing.  For example, mergers and acquisitions often show why the merger would succeed (from a quantitative point of view).  The executives have to rely on their instinct to tell them why it might not work.

The question for a decision maker then is how to tune in to your inner instincts and how to tune your inner instincts.

Executives and researchers discover that you need to have your subconscious knowledge emerge and connect with your conscious knowledge.  This can be done through meditative activities such as driving, day-dreaming, showering, and so on – it all depends on what works for you.

Our emotions assist in the decision making process by filtering out patterns that do not apply and by emphasising patterns that apply. In a sense, our emotions sort out and shortlist the considerations that our rational part of the brain can work with. When making decisions, be aware of your emotions and take them into consideration.

Gut instinct is simply based on rules and patterns we have within our subconscious. Some patterns may be built-in (true instincts).  Some are acquired through experience.

The quality of our gut instinct depends on the number of patterns our subconscious stores, the variety of patterns, and how it is able to interconnect those patterns.  The number of patterns come from our experiences, the variety comes the variety of experiences.

Instincts do not guarantee correct decisions. We need to continually self-assess our decisions and ‘train’ our instincts.  We can do this be reviewing our past decisions, reviewing why they were wrong, or why they were right.

Finally, it is important not to fall in love with your original decisions, but to keep flexible and adjust it as new information becomes available.

Example of a Decision Tree

A simple example of using a decision tree to help us with decision-making.

A couple renting an apartment and is wondering whether they should sign a 1-year contract on the rent.  If they sign a contract, their rent is guaranteed not to increase during the 1-year period. If they don’t sign a contract, their rent will increase by about $20 after 6 months.

This seems like a simple decision.  But there is a drawback to signing the contract. If the couple decides to terminate the contract before the end of 1 year, they are liable to pay up to 25 weeks worth of rent to the landlord, unless the landlord is able to get someone else to rent the place earlier. 

The couple intends to buy their own home if the right opportunity comes, so there is a chance that they would need to terminate any contract they sign.

Supposing the initial rent is $900 per month, what is the couple’s best option?

Let us choose the simplest situation first.  Let’s assume there is zero chance that the couple will terminate the contract.  So the decision tree looks like this:

The tree says that the option to sign a lease contract will result in a total 1-year rent of $10,800 ($900 * 12 months), while not signing a lease contract will result in a total 1-year rent of $11,800 ($900 * 6 months + $900 * 1.2 * 6 months).

But what happens if the couple finds their dream house and moves out of the house after 8 months?