Innovation Benefits Realization for Industrial Research (Part-7)

Technology Innovation Management
Framework for Industrial Research
Part-7
Dr. Iain Sanders

January 2005

WHAT SCIENTIFIC METHOD / APPROACH?

Platform 3:
(Stages VIII, Part 1)

Integrating Technology Innovation with Business Function – Part I: Laying the Foundation

PLATFORM 3: VIII (1)

What is our Scientific Method?

 The Process and Goal of Science
 History: What are the essential elements of Scientific method?
 Variables: How can we extract the most information from our
data?
 Induction and Pattern Recognition: Where is the boundary
between correlation and causality?
 Deduction: What are some of the more frequent deductive
fallacies committed unknowingly by „logical‟ scientists?
 Experimental Techniques: What troubleshooting procedures
have proven effective in all branches of science?
 Objectivity: Obtaining objective knowledge, despite
inescapable individual subjectivity.

6


What is our Scientific Method?
(Continued)
 The Process and Goal of Science (Continued)
 Evaluation of Evidence: How much leverage does prevailing
theory exert in the evaluation of new ideas?
 Insight: What are the major obstacles to scientific insight, and
how can we avoid them?
 The Scientist‟s World: What issues affect the scientist‟s
interactions with fellow scientists and with society?
 The Scientist: What are the essential characteristics of
successful scientists?

7


Critical Thinking

 11 Critical Thinking Questions
1. What are the issue and conclusion?
2. What are the reasons?
3. What words and phrases are ambiguous?
4. What are the value conflicts and assumptions?
5. What are the descriptive assumptions?
6. Are there any fallacies in the reasoning?
7. How good is the evidence?
8. Are there rival causes?
9. Are the statistics deceptive?
10. What significant information is omitted?
11. What reasonable conclusions are possible?

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Critical Thinking

1. What are the issue and conclusion?
 An issue is a question or controversy that is responsible for
the conversation or discussion
 A conclusion is the message that the speaker or writer
wishes you to receive and accept
2. What are the reasons?
 Reasons are explanations or rationales for why we should
believe a particular conclusion. They are what is offered as
a basis for why we should accept the conclusion
3. What words or phrases are ambiguous?
 Ambiguity refers to the existence of multiple possible
meanings for a word or phrase

9


Critical Thinking

4. What are the value conflicts and assumptions?
 An assumption is an unstated belief that supports the explicit
(i.e. expressed or shown clearly and openly) reasoning
 Values are ideas that people see as worthwhile. They
provide standards of conduct by which we measure the
quality of human behaviour)
 A value assumption is an implicit (i.e. expressed in an
indirect way) preference for one value over another in a
particular context)
5. What are the descriptive assumptions?
 A descriptive assumption is an unstated belief about how the
world was, is , or will become

10


Critical Thinking

6. Are there any fallacies in the reasoning?
 A fallacy is an idea which many people believe to be true,
but which is in fact false because it is based upon incorrect
information or faulty reasoning
7. How good is the evidence?
 What is your proof?
 Where‟s the evidence?
 Are you sure that‟s true?
 How do you know that‟s true?
 Why do you believe that?
 Can you prove it?

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Critical Thinking

8. Are there rival causes?
 In comparing causes (i.e. alternative explanations that might
fit the available evidence) apply the following criteria:
1. Their logical soundness
2. Their consistency with other knowledge that you have, and
3. Their previous success in explaining or predicting events

9. Are the statistics deceptive?
10. What significant information is omitted?
11. What reasonable conclusions are possible?

12


Critical Thinking

 An argument consists of a conclusion and the reasons that
allegedly support it
 What are descriptive assumptions? Assumptions are ideas
that, if true, enable us to claim that particular reasons
provide support for a conclusion
 Several clues aid in discovering descriptive assumptions:
 Keep thinking about the gap between the conclusion and reasons
 Look for ideas that support reasons
 Identify with the opposition
 Recognize the potential existence of other means of attaining the
advantage referred to in the reasons
 Learn more about the issues
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Critical Thinking
 Questions to ask about research findings to decide
whether or not they are dependable evidence:
1. What is the quality of the source of the report?
2. Other than the quality of the source, are there other clues included in the
communication suggesting the research was well done? E.g. does the
report detail any special strengths of the research?
3. Has the study been replicated? Has more than one study reached the
same conclusion?
4. How selective has the communicator been in choosing studies? E.g.
have relevant studies with contradictory results been omitted? Has the
researcher selected only those studies that support his / her point?
5. Is there any evidence of strong-sense critical thinking? Has the speaker
or writer shown a critical attitude toward earlier research that was
supportive of his / her point of view? Has the communicator
demonstrated a willingness to qualify?
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Critical Thinking
 Questions to ask about research findings to decide
whether or not they are dependable evidence (continued):
6. Is there any reason for someone to have distorted the research?
7. Are conditions in the research artificial and therefore distorted? Always
ask, “How similar are the conditions under which the research study
was conducted to the situation the researcher is generalizing about?”
8. How far can we generalize , given the research sample?
9. Are there any biases or distortions in the surveys, questionnaires,
ratings, or other measurements that the researcher uses?

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Critical Thinking

 Ways of detecting deceptive statistics:
1. Try to find out as much as you can about how the statistics were
obtained. Ask, “How does the author or speaker know?”
2. Be alert to users of statistics concluding one thing, but proving another.
3. Blind yourselves to the writer‟s or speaker‟s statistics and compare the
needed statistical evidence with statistics actually provided
4. Form your own conclusion from the statistics. If it doesn‟t match the
author‟s or speaker‟s, then something is probably wrong
5. Determine what information is missing. Be especially alert for
misleading numbers and percentages and for missing comparisons

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Critical Thinking

 What significant information is omitted?
 There are at least five reasons for the prevalence
of omitted information:
1. Time and space limitations
2. Limited attention span
3. Inadequacies in human knowledge
4. Deception
5. Different perspectives

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Critical Thinking

 Common Kinds of Significant Omitted Information:
1. Common counter-arguments:
a. What reasons would someone who disagrees offer?
b. Are there research studies that contradict the studies presented?
c. Are there missing examples, testimonials, or analogies that support
the other side of the argument?
2. Missing definitions:
a. How would the arguments differ if key terms were defined in other
ways?
3. Missing value preference or perspectives:
a. From what other set of values might one approach this issue?
b. What kinds of arguments would be made by someone approaching
the issue from a different set of values?

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Critical Thinking

4. Origins of “facts” alluded to in the argument:
a. Where do the „facts‟ come from?
b. Are the factual claims supported by well-done research or by
reliable sources?
5. Details of procedures used for gathering facts:
a. How many people completed the questionnaire?
b. How were the survey questions worded?
6. Alternative techniques for gathering or organizing the evidence:
a. How might the results from an interview study differ from written
questionnaire results?

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Critical Thinking

7. Missing or incomplete figures, graphs, tables, or data:
a. Would the figure look different if it included evidence from earlier or
later years?
b. Has the author “stretched” the figure to make the differences look
larger?
8. Omitted effects, both positive and negative, and both short- and
long-term, of what is advocated and what is opposed:
a. Has the argument left out important positive or negative
consequences of a proposed action?
b. Do we need to know the impact of the action on any of the following
areas: political, social, economic, biological, spiritual, health, or
environmental?

20


Critical Thinking

9. Context of quotes and testimonials:
a. Has a quote or testimonial been taken out of context?
10. Benefits accruing to the author from convincing others to follow
his/her advice?
a. Will the author benefit financially if we adopt his/her proposed
policy?

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Critical Thinking
 What reasonable conclusions are possible?
 Very rarely do reasons mean just one thing
 After evaluating a set of reasons, you still must decide what conclusion
is most consistent with the best reasons in the controversy
 To avoid dichotomous thinking in your search for the strongest
conclusion, provide alternative contexts for the conclusions through the
use of: when, where, and why questions
 Qualifications for conclusions will move you away from dichotomous
thinking
 If… clauses provide a technique for expressing these qualifications

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COMPARE OPPORTUNITIES

Platform 3:
(Stages VIII, Part 2)

Integrating Technology Innovation with Business Function – Part I: Laying the Foundation


How do we Compare Opportunities?

 Decision-Making
 Apply an effective decision-making process to systematically
evaluate options, select the most appropriate course of
action, and address problems and risks.

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Effective Decision-Making

 An effective decision-making process will fulfill
six criteria:
1. It focuses on what‟s important
2. It is logical and consistent
3. It acknowledges both subjective and objective factors and
blends analytical with intuitive thinking
4. It requires only as much information and analysis as is
necessary to resolve a particular dilemma
5. It encourages and guides the gathering of relevant
information and informed opinion
6. It is straightforward, reliable, easy to use, and flexible

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Effective Decision-Making
A. Work on the right decision [ PROBLEM ] PR
B. Specify your [ OBJECTIVES ] O
C. Create imaginative [ ALTERNATIVES ] A
D. Understand the [ CONSEQUENCES ] C
E. Grapple with your [ TRADEOFFS ] T
F. Clarify your [ UNCERTAINTIES ]
G. Think hard about your [ RISK TOLERANCE ]
H. Consider [ LINKED DECISIONS ]
I. Consider PSYCHOLOGICAL TRAPS
J. Be a WISE DECISION-MAKER:
1. GET STARTED 2. CONCENTRATE ON WHAT'S IMPORTANT
3. DEVELOP A PLAN OF ATTACK 4. CHIP AWAY AT COMPLEXITY
5. GET UNSTUCK 6. KNOW WHEN TO QUIT
7. USE YOUR ADVISORS WISELY 8. ESTABLISH BASIC DECISION-MAKING PRINCIPLES
9. TUNE UP YOUR DECISION- 10. TAKE CHARGE OF YOUR DECISION-MAKING
MAKING STYLE

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(A) Work on the right decision
[ PROBLEM ]
 Define the decision problem in such a way as to solve the right problem
 Be creative about the problem definition
 Turn problems into opportunities
 Define the decision problem:
 Ask what triggered this decision. Why am I even considering it? State the trigger
as clearly as you can, including: (1) your assumption of what the decision problem
is; (2) the triggering occasion; and (3) the connection between the trigger and the
problem
 Question the constraints in your problem statement
 Identify the essential elements of the problem
 Understand what other decisions impinge on or hinge on this decision
 Establish a sufficient but workable scope for your problem definition
 Gain fresh insights by asking others how they see the situation
 Re-examine your problem definition as you go
 Maintain your perspective
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(B) Specify your [ OBJECTIVES ]
 Clarify what really trying to achieve with the decision
 Let objectives be your guide:
 Objectives help you determine what information to seek
 Objectives help you explain your choice to others
 Objectives determine a decision‟s importance, and, consequently, how much
time and effort it deserves
 Pitfalls to watch out for and avoid:
 Often, decision-makers take too narrow a focus
 They concentrate on the tangible and quantitative (cost, availability) over the
intangible and subjective (features, ease of use)
 They tend to stress the short-term (enjoy life today) over the long-term (have a
comfortable retirement)
 Pitfalls occur for two main reasons:
1. Many people spend too little time and effort on the task of specifying objectives
2. Getting it right isn‟t easy

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 Master the art of identifying objectives
 Write down all the concerns you hope to address through your decision. Flesh
out your list by trying some of these techniques:
1. Compose a wish list. Describe as completely as you can everything that you could
ever ant from your decision. What would make you really happy?
2. Think about the worst possible outcome. What do you most want to avoid?
3. Consider the decision‟s possible impact on others. What do you wish for them?
4. Ask people who have faced similar situations what they considered when making their
decision
5. Consider a great – even if unfeasible – alternative. What‟s so good about it?
6. Consider a terrible alternative. What makes it so bad?
7. Think about how you would explain your decision to someone else. How would you
justify it? Your answers may uncover additional concerns.
8. When facing a joint or group decision, one involving colleagues, for instance, first have
each person involved follow the above suggestions (1-7) individually. Then combine
the lists, using the varied perspectives to expand and refine first-take ideas.

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 Convert your concerns into succinct objectives
 Separate ends from means to establish your fundamental
objectives. Asking „why?‟ will lead you to what you really
care about – your fundamental objectives, as opposed to
your mean objectives. Means objectives represent way
stations in the progress toward a fundamental objective, the
point at which you can say, “I want this for its own sake. It is
a fundamental reason for my interest in this decision”.
 Each means objective can serve as a stimulus for generating
alternatives and can deepen your understanding of your decision
problem
 Only fundamental objectives should be used to evaluate and
compare alternatives
 Clarify what you mean by each objective
 Test your objectives to see if they capture your interests

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 Practical advice for nailing down your objectives:
 Objectives are personal
 Different objectives will suit different decision problems
 Objectives should not be limited by the availability of or ease
of access to data
 Unless circumstances change markedly, well thought-out
fundamental objectives for similar problems should remain
relatively stable over time
 If a prospective decision sits uncomfortably in your mind, you
may have overlooked an important objective

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(C) Create imaginative
[ ALTERNATIVES ]
 Make smarter choices by creating better alternatives to choose from
 Don‟t box yourself in with limited alternatives
 The keys to generating better alternatives:
 Use your objectives – ask “How?” Asking “Why?” took you from mans to ends;
asking “How?” will take you from ends back to means
 Challenge constraints
 Set high aspirations
 Do your own thinking first
 Learn from experience
 Ask others for suggestions
 Give your subconscious time to operate (the subconscious needs time and
stimulation to do this well)
 Create alternatives first, evaluate them later
 Never stop looking for alternatives

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(C) Create imaginative
[ ALTERNATIVES ]
 Taylor your alternatives to your problem:
 Process alternatives: e.g. voting, auctions
 Win-win alternatives
 Information-gathering alternatives
 Time-buying alternatives
 Know when to quit looking for alternatives. You need to balance the effort made
against the quality of the alternatives found. To strike the right balance, ask
yourself these questions:
 Have you thought hard about your alternatives, using the techniques listed above?
 Would you b satisfied with one of your existing alternatives as a final decision?
 Do you have a range of alternatives? Are some alternatives distinctly different from the
others? (If your alternatives all seem too similar, you need to push your creativity)
 Do other elements of this decision (such as consequences and tradeoffs) require your time
and attention?
 Would time spent on other decisions or activities be more productive?
If you answer “yes” to each of these questions, stop looking for more
alternatives and apply your energies elsewhere
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(D) Understand the
[ CONSEQUENCES ]
 Describe how well each alternative meets your objectives
 Describe consequences with appropriate
accuracy, completeness, and precision
 Build a consequence table:
1. Mentally put yourself in the future
2. Create a free-form description of the consequences of each alternative. Write
down each consequence using the words and numbers that best capture its key
characteristics:
 Gather hard information
 Use numbers where appropriate
 Use graphics – diagrams, photos, symbols – if they are revealing and can be used
consistently
 Check your description against your list of objectives. Do your descriptions take into
account all your objectives? If you‟ve missed any, you will need to fill in the gaps.
Does any of your descriptions imply a previously unstated objective? If so, you will
want to evaluate its appropriateness and, if it is to be retained, apply it to your other
alternatives
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(D) Understand the
[ CONSEQUENCES ]
 Build a consequence table (continued):
3. Eliminate any clearly inferior alternatives. Try to knock one
alternative out with another: for example:
 Take two alternatives. Select one as the tentative „king‟, e.g. the status
quo
 Use your descriptions to identify the pros (in one list) and the cons (in
another) of the king in relation to the second alternative, making sure
you cover each objective . If one alternative emerges as clearly
superior, eliminate the other an use he survivor as the king for the next
comparison. If neither is eliminated, retain the second alternative and
continue your comparisons using your original king.
 Continue through your lists of alternatives, comparing them in pairs. At
the end of the process, one alternative may emerge as the clear
selection. If not, continue to the next step
4. Organize descriptions of remaining alternatives into a consequence
table
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(D) Understand the
[ CONSEQUENCES ]
 Compare alternatives using the consequence table:
 Using pencil and paper or a computer spreadsheet, list your
objectives down the left side of a page and your alternatives along the
top. (This will give you an empty matrix)
 In each box of the matrix, write a concise description of the
consequence that the given alternative (indicated by the column) will
have for the given objective (indicated by the row). You‟ll likely
describe some consequences quantitatively, using numbers, while
expressing others in qualitative terms, using words. The important
thing is to use consistent terminology in describing all the
consequences for a given objective – in other words, use consistent
terms across each row. Now, compare pairs of alternatives
again, and eliminate any that are inferior. If the choice is not
obvious, you‟re going to have to make tradeoffs (see the next section)

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(D) Understand the
[ CONSEQUENCES ]
 Master the art of describing consequences:
 Try before you buy: experience the consequences of an alternative before you choose
it, whenever this is feasible
 Use common scales to describe the consequences (that represent
measurable, meaningful categories that capture the essence of your objective). For
intangible qualities:
1. Select a meaningful scale that captures the essence of the corresponding objective
2. Construct a subjective scale that directly measures your objective. To construct a
scale yourself, you need to define concretely as many levels as are needed to
distinguish significant differences in consequences
 Don‟t rely on hard data:
 Give due recognition to objectives that can‟t be measured by hard data
 Choose scales that are relevant, regardless of the availability of hard data
 Make the most of available information
 Use experts wisely
 Choose scales that reflect an appropriate level of precision
 Address major uncertainty head on 37


(E) Grapple with your [ TRADEOFFS ]

 Making tough compromises when you can‟t achieve all your
objectives at once
 Find and eliminate dominated alternatives before having to
make tradeoffs
 Make tradeoffs using even swaps if you still have more than
one alternative in contention
 The even swap method:
 If all alternatives are rated equally for a give objective – for example all
cost the same – then you can ignore that objective in choosing among
those alternatives
 As more objectives are eliminated, additional alternatives can be
eliminated because of dominance, and the decision becomes easier

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 The even swap method (continued):
 The even swap method provides a way to adjust the consequences of
different alternatives in order to render them equivalent in terms of a given
objective
 Thus the objective becomes irrelevant for making a decision because no
consequence is dominant:
 E.g. AA charges $100 more than UA for a flight. You might swap a $100
reduction in AA charges for 2,000 less AA frequent flyer miles. I.e. you‟d „pay‟
2,000 frequent flyer miles for the fare cut. As its name implies, an even swap
increases the value of an alternative in terms of one objective while decreasing
its value by an equivalent amount in terms of another objective
 In essence, the even swap method is a form of bartering – it forces you to
think about the value of one objective in terms of another

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 Steps for the even swap method:
1. Determine the change necessary to cancel out an objective
2. Assess what change in an other objective would compensate for the needed change
3. Make the even swap
4. Cancel out the now-irrelevant objective
5. Eliminate the dominated alternative
 Practical advice for making even swaps:
 Make the easiest / easier swaps first
 Concentrate on the amount of the swap, not on the perceived importance of the objective
 Value an incremental change based on what you start with. It‟s not enough to look just at
the size of the slice; you also need to look at the size of the pie
 Make consistent swaps
 Seek out information to make informed swaps
 Practice makes perfect

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(F) Clarify your [ UNCERTAINTIES ]

 Think about and act on uncertainties affecting
your decision
 Distinguish smart choices from good
consequences: e.g.
 A smart choice, a bad consequence
 A poor choice, a good consequence
 Use risk profiles to simplify decisions involving
uncertainty. To make sense of uncertainty, you
need to fund a way to simplify it – to isolate its
elements and evaluate them one by one. You can
do this by using risk profiles

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 A risk profile captures the essential information
about the way uncertainty affects an alternative.
It answers four key questions:
1. What are the key uncertainties?
2. What are the possible outcomes of these uncertainties?
3. What are the chances of occurrence of each possible
outcome?
4. What are the consequences of each outcome?

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 How to construct a risk profile
A. Identify the Key Uncertainties:
1. List all the uncertainties that might significantly influence the consequences of any
alternatives
2. Consider these uncertainties one at a time and determine whether and to what degree
their various possible outcomes might influence the decision. When there are many
possible uncertainties, winnow them down to the few that are likely to matter most
B. Define Outcomes:
1. How many possible outcomes need to be defined to express the extent of each
uncertainty?
2. How can ach outcome best be defined?
C. Assign Chances:
1. Use your judgement
2. Consult existing information
3. Collect new data
4. Ask experts
5. Break uncertainties into their components

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 How to construct a risk profile (continued)
D. Clarify the Consequences: depending upon the
complexity of the decision, lay out the con-
sequences in one of three ways:
1. A written decision (least precise)
2. A qualitative description by objective
3. A quantitative description by objective
(most precise)
 Picture risk profiles with decision trees
 Example of a Decision Tree:

Should we develop a new product or consolidate?

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(G) Think hard about your
[ RISK TOLERANCE ]
 Account for your appetite for risk
 Understand your willingness to take risks
 The more likely the outcomes with better consequences and
less likely the outcomes with poor consequences, the more
desirable the risk profile to you
 Incorporate your risk tolerance into your
decisions: taking the following three steps:
1. Think hard about the relative desirability of the
consequences of the alternatives you‟re considering
2. Balance the desirability of the consequences with their
chances of occurring
3. Choose the most attractive alternative
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[ RISK TOLERANCE ]
 Quantify risk tolerance with desirability scoring. This is a 4-
step process:
1. Assign desirability scores to all consequences. Begin by comparing the
consequences and ranking them from best to worst. Assign the score of 100 to the
best and 0 to the worst consequence. Assign a score to each of the remaining
consequences that reflects its relative desirability
2. Calculate each consequence‟s contribution to the overall desirability of the
alternative. Account for each outcome‟s chance of occurring – its probability.
Multiply its associated outcome‟s probability by its desirability score assigned in the
first step
3. Calculate each alternative‟s overall desirability score. Add the individual
consequence contributions (step 2) to arrive at an overall desirability score for each
alternative. (The overall desirability score of an alternative is the average of the
desirability scores of its consequences, weighted by the chances of their associated
outcomes)
4. Compare the overall desirability scores associated with the alternatives and choose
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[ RISK TOLERANCE ]
 The desirability curve: when you have many possible
consequences, the assignment of desirability scores can become
difficult and time consuming. Fortunately, there is a shortcut: the
desirability curve. After plotting the desirability scores of a few
representative consequences – you connect them on a graph to form
a curve. You can then use this curve to determine the desirability
scores of all other possible consequences
 There‟s one important limitation to the use of desirability curves: you
can use them only when each of the consequences can be expressed
using a single, numerical variable, such as dollars, acres, years, or
lives saved etc.
 Desirability curves can be so useful , however, that it will often be
worthwhile to use the Even Swap Method to convert consequences
described by multiple variables into a single, numerical term
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[ RISK TOLERANCE ]
 The desirability curve can deal with variable subjective risk tolerance.
What you do is:
1. Construct a desirability curve (often referred to in the literature as a
utility curve) that assigns a desirability score to each payoff that reflects
the subjective desirability of (e.g. a financial investment‟s return to you)
see figure below:
100
MORE RISK
AVERSE

Desirability
RISK AVERSE NEUTRAL RISK RISK SEEKING
Score

MORE RISK
SEEKING
0
Worst Consequence Best
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[ RISK TOLERANCE ]
2. Use the desirability scores of the possible payoffs and their chances to
calculate an overall desirability score for each alternative
3. Choose by comparing the overall desirability scores of the alternatives
 For a given risk profile, the risk adjustment is an indicator of your risk
aversion. The larger the risk adjustment for any given risk profile, the
more risk averse you are and vice versa
100
MORE RISK
AVERSE

Desirability
RISK AVERSE NEUTRAL RISK RISK SEEKING
Score

MORE RISK
SEEKING
0
Worst Consequence Best
49


[ RISK TOLERANCE ]
 In fact, the shape of your desirability curve is a very good indicator of
your overall risk tolerance. An upwardly bowed curve indicates a risk-
averse attitude with a greater risk aversion indicated by greater
curvature. A straight line represents a risk-neutral attitude, and a
downwardly bowed curve connotes a risk-seeking attitude
 Pitfalls to watch out for:
 Don‟t over focus on the negative. In many cases the upside potential will far
outweigh the downside risk. Consider the full range of consequences, not just
the bad ones
 Don‟t fudge the probabilities to account for risk. Judge chances on their own
merits, without regard for your risk tolerance. Account for your risk tolerance
separately
 Don‟t ignore significant uncertainty. Don‟t eliminate complexity by ignoring
uncertainty. When uncertainty is significant, develop a risk profile for each
alternative which captures the essence of the uncertainty
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[ RISK TOLERANCE ]
 Pitfalls to watch out for (continued):
 Avoid foolish optimism. Think hard and realistically about what can go wrong as
well as what can go right
 Don‟t avoid making risky decisions because they are complex. Don‟t despair;
you can deal sensibly with complexity and reach a smart choice
 Make sure your subordinates reflect our organization‟s risk tolerance in their
decisions. An organization‟s leaders should take three simple steps to guide
subordinates in dealing successfully with risk
1. Sketch desirability curves that reflect the risk-taking attitude of our
organization
2. Communicate the appropriate risk tolerance by issuing guidelines that
include examples of how typical risky decisions should be handled
3. Examine the organization‟s incentives to ensure that they are consistent with
the desired risk-taking behaviour

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[ RISK TOLERANCE ]
 Open up new opportunities by managing risk. When facing a risk that
exceeds your comfort level, there may be ways to manage this risk to
make it acceptable to you:
1. Share the risk. When a good opportunity feels to risky, share the risk with
others
2. Seek risk-reducing information. Try to temper risk by seeking information that
can reduce uncertainty
3. Diversify the risk. Avoid placing all your eggs in just a few baskets. Look for
ways to diversify
4. Hedge the risk. When fluctuations in market prices or rates (e.g. interest rates,
exchange rates etc.) expose you to discomforting risk, look for ways to hedge:
e..g buying contracts on the commodities exchange that put a floor on future
prices, sign annual fixed-price contracts etc.
5. Insure against risk. Whenever a risk consists of a significant but rare downside,
with no upside, try to insure against it. But don‟t over-insure
52


(H) Consider [ LINKED DECISIONS ]
 Plan ahead by effectively coordinating current and future
decisions
 Make smart linked decisions by planning ahead. Making smart
choices about linked decisions requires understanding the
relationships among them
 The decisions linked to a basic decision can take two forms:
1. Information decisions – are pursued before making the basic decision.
They are linked because the information you obtain helps you make a
smarter choice in the basic decision
2. Future decisions – are made after the consequences of a basic decision
become known. They are linked because the alternatives that will be
available in the future depend on the choice made now
 By plotting out these relationships as a decide-learn
sequence, you are able to clarify the sequence of decisions and
see how each one will influence the others

53



 Relationship among linked decisions

INFORMATION DECISIONS BASIC DECISION FUTURE DECISIONS

CHOOSE TO
DECIDE NOW
MAKE BASIC LEARN
DECISION OUTCOMES MAKE
CHOOSE
NOW, OR TO OF UNCERT- FUTURE
ALTERNATIVE
GET INFORM- AINTIES DECISIONS LEARN
WITH BEST
ATION TO LEARN NEW OUTCOMES
RISK PROFILE
RDUCE INFORMATION REVISE (TAKING INTO OF FUTURE
UNCERTAINTY GET JUDGEMENTS ACCOUNT UNCERT-
(BASED ON
INFO REVISE ABOUT WHAT YOU AINTIES
INFORMATION
CHOOSE JUDGEMENTS FUTURE HAVE
AVAILABLE)
WHAT ABOUT UNCERT- LEARNED)
INFORMATION UPCOMING AINTIES
TO GET UNCERTAINTIES

DECIDE LEARN DECIDE LEARN DECIDE LEARN

Passage of time
54



 The essence of making smart linked decisions is
planning ahead
 Makers of effective linked decisions, like
successful chess players, plan a few decisions
ahead before making their current decision
 Follow six steps to analyze linked decisions. The
trick to making such decisions, is to size up the
situation and then focus your attention on those
aspects that matter most

55


 First step to analyzing linked decisions
 Understand the basic decision problem. Begin with the first three core
elements of our general approach: define the problem, specify objectives,
and generate alternatives.
 Then identify the uncertainties that influence the consequences of the
alternatives.
 The uncertainties are the crux of linked decisions. Without them, there
would be no reason to link decisions in decide-learn sequences, because
there would be nothing to learn between decisions
 Draw up a list of the uncertainties. Then narrow the list down, selecting
the few uncertainties, maybe just one or two, that most influence
consequences.
 These uncertainties are candidates for developing risk profiles, if
necessary, in future steps
 For less significant uncertainties, make a reasonable assumption of how
they will turn out. There is no need to do a full analysis of every
uncertainty confronting you
56


 Second step to analyzing linked decisions
 Identify ways to reduce critical uncertainties
 Getting information before deciding means becoming proactive about the
learning portion of the decide-learn sequence.
 You consciously defer making a basic decision in order to seek
information that can reduce or resolve future uncertainties and thus
improve your basic decision
 To create information-gathering strategies, you need to decide what
information is important and how to gather it:
 For each critical uncertainty, list the kinds of information that could
reduce your uncertainty, and then determine how your view of the
decision might change in the face of the new information
 Think about ways to obtain the important information. To collect
information, use different methods to determine what to get and how
to get it

57


 Third step to analyzing linked decisions
 Identify future decisions linked to the basic decision
 To identify relevant future decisions, you need to ask what decisions
would naturally follow each alternative in your basic decision
 For your linked decisions, list all the future decisions you can think
of, then winnow the list to the few that seem most significant
 How far should you look when considering potential future decisions?
Not too far. Look for a natural time horizon – where future decisions are
only weakly linked to the consequences of your basic decision
 In most cases, include your basic decision and, at most, two future
decisions. Keep it simple

58


 Fourth step to analyzing linked decisions
 Understand relationships in linked decisions. You can draw a decision
tree to represent the links between choices and learned information in
sequence. The tree should include the basic decision and any important
information decisions and future decisions linked to it
 Here are a few suggestions for drawing a decision tree:
1. Get the timing right. What happens when? What comes before what?
When will key information become available? When can decisions be
made? Organize your answers into a table, a timeline, or a figure (like
the one shown previously) to help you understand the flow of
information, events, and decisions. Anticipating the timing of and the
order in which decisions should be made and information gathered is
fundamental to making effective linked decisions
2. Sketch the essence of the decision problem. Use your notes to construct
a decision tree. Start on the left with information choices (if any) and
outcomes, then fill in the middle by defining your basic decision, and
finally complete the right side of the tree with future decisions and
uncertainties associated with them
59


 Fourth step to analyzing linked decisions (continued)
 Here are a few suggestions for drawing a decision tree (continued):
3. Describe the consequences at the end points. The end points on the
tree represent the consequences of having followed a particular
sequence of alternatives and outcomes. Use the ideas listed under (D)
Consequences and (F) Uncertainties to describe the consequences of
each sequence in terms of your fundamental objectives, keeping in mind
what can happen in the future and what has already happened along the
way

60


 Fifth step to analyzing linked decisions
 Decide what to do in the basic decision
 To “solve” your basic decision problem, you want to think ahead and
then work backward in the time. The decision tree will help you
 Start at the end of the tree (the right side) and work backward. At each
decision point, think hard and decide what choice you would like when
and if you ever reach that point
 Lop off the branches representing the alternatives not taken
 Continue working backward until you reach the individual alternatives for
the basic decision
 You will now have a plan for each alternative so you will be able to
evaluate it more clearly

61


 Sixth step to analyzing linked decisions
 Treat later decisions as new decision problems
 However well you‟ve prepared earlier, when you actually reach
subsequent decision points, you should rethink the situation
 Your circumstances and perspective may have changed, and, due to the
passage of time, you can now see further ahead from this point than you
could before
 Take advantage of new knowledge to enhance your understanding of
your new decision problem and improve your plan
 What was once a future decision is now a nw basic decision

62



 Keep your options open with flexible plans
 Sometimes uncertainty is so great and the present
environment so changeable that it is difficult to
plan future decisions with confidence
 Flexible plans keep your options open. They can
take a number of forms

63



 Examples of Flexible Plans:
 All-weather plans. They represent a compromise strategy. In
highly volatile situations, where the risk of outright failure is
great, an all purpose plan is often the safest plan
 Short-cycle plans. With this strategy, you make the best
possible choice at the outset, then reassess that choice often
 Option wideners. Sometimes the best plan is to act in a way
that expands your set of future alternatives
 Be “prepared” plans. These backup plans stress
preparedness – having a reasonable response available for
most contingencies. As the old expression has it, “Success is
what happens when preparation meets opportunity”

64



 Maintain your perspective. Your comfort level with
your choices may not be as high on linked
decisions as on simpler ones, but your
accomplishments may be much greater
 Over time, making smart choices on linked
decisions will affect your life and career more
positively and profoundly than making perfect
choices on all your simpler decisions put together

65


(I) Consider PSYCHOLOGICAL TRAPS

 Avoid some of the tricks your mind can play on
you when you‟re deciding
 The eight most common and most serious errors
in decision-making:
1. Working on the wrong problem
2. Failing to identify your key objectives
3. Failing to develop a range of good, creative alternatives
4. Overlooking crucial consequences of your alternatives
5. Giving inadequate thought to tradeoffs
6. Disregarding uncertainty
7. Failing to account for your risk tolerance
8. Failing to plan ahead when decisions are linked over time

66


(I) Consider PSYCHOLOGICAL TRAPS
 There are also an entirely different category of errors known as
“psychological traps”
 The best protection against these traps is awareness:
I. Over-relying on first thoughts: The Anchoring Trap
II. Keeping on keeping on: The Status Quo Trap
III. Protecting earlier choices: The Sunk-Cost Trap
IV. Seeing what you want to see: The Confirming-Evidence Trap
V. Posing the wrong question: The Framing Trap
VI. Being too sure of yourself: The Over-Confidence Trap
VII. Focusing on dramatic events: The Recallability Trap
VIII. Neglecting relevant information: The Base-Rate Trap
IX. Slanting probabilities and estimates: The Prudence Trap
X. Seeing patterns where none exist: The Outguessing Randomness Trap
XI. Going mystical about coincidences: The Surprised-By-Surprises Trap

67


(J) Be a WISE DECISION-MAKER
 Make smart choices a way of life
 The art of good decision making lies in systematic thinking. A
systematic approach helps you to:
1. Address the right decision problem
2. Clarify your real objectives
3. Develop a range of creative alternatives
4. Understand the consequences of your decision
5. Make appropriate trade-offs among conflicting objectives
6. Deal sensibly with uncertainties
7. Take account of your risk-taking attitude
8. Plan ahead for decisions linked over time
 Procrastination is the bane of good decision making – so get
started. And once you get started, don‟t let yourself get bogged
down. For a simple or routine decision, imagine that you have
only a few minutes to make it; for a more important complex
decision, imagine that you have only a few hours
68


(J) Be a WISE DECISION-MAKER

 The core practices of the successful decision
maker:
I. Get started
II. Concentrate on what‟s important
III. Develop a plan of attack
IV. Chip away at complexity
V. Get unstuck
VI. Know when to quit
VII. Use your advisors wisely
VIII. Establish basic decision making principles
IX. Tune up your decision making style
X. Take charge of your decision making

69


(J) I. Get Started
 Ten diagnostic questions:
1. What‟s my decision problem? What, broadly, do I have to decide? What specific
decisions do I have to make as a part of the broad decision?
2. What are my fundamental objectives? Have I asked “why” enough times to get to my
bedrock wants and needs?
3. What are my alternatives? Can I think of more good ones?
4. What are the consequences of each alternative in terms of the achievement of each of
my objectives? Can my alternatives be safely eliminated?
5. What are the tradeoffs among my more important objectives? Where do conflicting
objectives concern me the most?
6. Do any uncertainties pose serious problems? If so, which ones? How do they impact
the consequences?
7. How much risk am I willing to take? How good and how bad are the various possible
consequences? What are ways of reducing my risk?
8. Have I thought ahead, planning out into the future? Can I reduce my uncertainties by
gathering information? What are the potential gains and the costs in time, money, and
effort?
9. Is the decision obvious or pretty clear at this point? What reservations do I have about
deciding now? In what ways could the decision be improved by a modest amount of
added time and effort?
10. What should I be working on? If the decision isn‟t obvious, what do the critical issues
appear to be? What facts and opinions would make my job easier?
70


(J) I. Get Started

 Quickly run through all the decision elements:
problem, objectives, alternatives, consequences, t
radeoffs, uncertainties, risk tolerance, and linkage

 Analyze each quickly. Don‟t worry about doing
things just right

 Try for an overview of your decision problem. See
how the pieces fit together

71


(J) II. Concentrate on What‟s
Important
 For most decisions, it will be whatever is bothering
you about the decision

 If what‟s important isn‟t obvious, ask yourself
“What‟s blocking me from making this decision?
Why can‟t I just decide now?”

 The answer will indicate where you need to focus
your attention

72


(J) III. Develop a Plan of Attack
 Once you‟ve scoped out the decision and focused your sights, you‟ll
next want to plan an orderly approach to find a resolution to your
decision problem. Do you need information? Clearer objectives?
Better alternatives? Proceed systematically to fill in the gaps, and
then review your understanding of your decision problem as a whole
 Remember, however, that the problem definition may change as you
dig in, so be flexible. Ask these kinds of questions:
 Is my decision obvious now?
 If not, is it worth more effort, or should I just pick the best contender?
 What have I learned? How has my perception of the problem changed?
 What should I work on next?
 Revise your plan and continue. Repeat this process as necessary
until your decision is made. Always be willing to stop, reassess, and
reformulate your plan. Keep asking, “What‟s bothering me? What‟s
blocking me? Why can‟t I just decide now?”

73


(J) IV. Chip Away at Complexity

 The following techniques will help you cope with
some seemingly impossible situations
 Make decisions in layers: with a series of interrelated
decisions, start with the broadest one first, work down to the
next level, then further down to the more detailed level: e.g.
1. What job to take in a new city 
2. What neighbourhood to live in 
3. What apartment to rent
At each level, make sure you have a sense of the most
promising alternatives in the next level down, as they might
influence your current, higher-level choice. E.g. make
strategic decisions first, tactical decisions second, and
operational decisions last

74



 The following techniques will help you cope with some
seemingly impossible situations (cont.)
 Zoom out and zoom in: zooming out corresponds to looking at the big
picture (the higher-level, strategic decision); zooming in corresponds to
examining the details (the lower-level, tactical and operational
decisions). With zooming, however, you don‟t make decisions at any
level until you‟ve considered decisions at each level several times. You
start zoomed out and tentatively make the high-level decision, then you
zoom in and consider how you would make several lower-level
decisions that depend on the higher-level decision. Having done
that, you zoom back out and reconsider the higher-level decision, armed
with the perspective of having seen its implications at the lower level.
You may zoom in and out several times before settling on the higher-
level decision. Considering the impact on lower-level decisions serves
as a reality check on the higher-level one before you make it
75


 The following techniques will help you cope with
some seemingly impossible situations (cont.)
 Compare consistent decision bundles: certain choices naturally go
together – they constitute consistent bundles. E.g. job offer with
neighbourhood to live in and part-time graduate studies to pursue
nearby
 Pick the appropriate level of detail: match the level of detail in your
analysis to the breadth of your problem definition; the broader the
definition, the less detailed the analysis needs to be. Time after
time, we see people greatly expand the breadth of a problem
definition, maintain a high level of detail, and then complain about
complexity. (The art of being wise is knowing what to overlook).
You must find , by trial and error, advice, or experience, the level of
detail that works for the decision problem at hand
76


(J) V. Get Unstuck
 Many times in a decision making process you may
find yourself stuck, unable to make any forward
progress. Sometimes you can‟t get started
 Find someone to talk to about your decision problem – let your
mouth start your mind. Once you get talking, you‟ll see
connections you never saw before. All the better if you
prepare for the session by jotting down notes beforehand
 A good way to get unstuck is to imagine that you have to
advise someone else who has the a problem identical to
yours. “If you had to give advice to someone else in exactly
this same situation, what would you say?”
 Another way out: if you face an obstacle to making a decision,
consider what you would do if the obstacle disappeared. If
money is the problem, for example, imagine that you have all
you‟ll ever need

77


(J) VI. Know When to Quit
 Balance deliberation with speed. How do you know when enough is
enough? You balance the cost of putting in the extra effort against the
benefit of possibly coming up with a better choice. These questions will
help you decide:
 Do you feel you have a reasonable grasp of your decision problem?
 Have you already thoughtfully covered each element in the decision making
process relevant to your decision?
 Would you be satisfied if you chose one of the existing alternatives?
 Could the best alternatives disappear if you wait much longer?
 Is it unlikely that could devise a new, better alternative with additional time for
thought?
 Would a perfect solution be only slightly better than your current best alternative?
 Will taking more time for this decision seriously detract from your other important
activities and decisions?
 Clearly, if all or almost all your answers to these questions are “yes” you
should quit analyzing and decide. Sometimes you have to consciously
protect yourself against overdoing it. “Analysis paralysis”. Seldom does a
perfect solution exist
78


(J) VII. Use Your Advisors Wisely
 To make a decision beyond your sphere of expertise, you‟ll
often need to seek advice from others. But if you ask your
experts to decide for you, rather than help you to
decide, your choices are unlikely to fully reflect your
objectives, tradeoffs, and risk tolerance
 If you want advice on what to decide, make sure you
communicate your objectives, tradeoffs, and risk tolerance
along with your perception of the problem. Better
yet, decide for yourself after soliciting and incorporating
their input on problem
definition, alternatives, consequences, and uncertainties
 Use advisors for what they‟re good at – providing
information about what is or what might be. Use your own
judgement about what you know much better than they can –
namely, your values and objectives. Then combine it all
yourself and decide. After all, its your choice
79


(J) VIII. Establish Basic Decision-
Making Principles
 Minor, routine decisions rarely warrant a full-blown
analysis. But although they may be relatively
inconsequential as individual decisions, the sum
of all of them can be very consequential
 You will gain by making thoughtful decisions
about the principle on which you make everyday
choices. That way, when you decide routinely –
almost on automatic pilot – your autopilot will
have some policies built in that reflect your long-
range values. In addition, your routine choices will
b easier to make and require less effort if they are
guided by these principles
80


(J) IX. Tune Up Your Decision
Making Style
 Overtime you develop a decision making style: a set of habits that
governs your decision making. Periodically review your
performance on several of your recent decisions.
 To facilitate the review and the resulting learning, write down the
basis and logic for each of your important decisions at the time you
make them. Use these notes in your evaluation. Look for patterns
 What does your behaviour tell you about your style? For instance:
 Are your alternatives imaginative (creative) enough?
 Do you spend too much time on less important issues?
 Do you tend to gravitate toward choices that, after the fact, seem too
conservative?
 Do you feel that you are in control of your decision making, or do decisions
just happen to you?

81


Making Style
 Having done a review, are you happy with your style? Does it help
or hinder you in achieving what you want? What, if anything would
you change? What would you work on?
 You can do the reviews by yourself, but using a partner can often
provide greater insight
 The benefits to each of you will be manifold: in addition to gaining
an outside perspective on your decision making techniques, you will
benefit from seeing another‟s approach and from doing some
coaching
 Be careful not to judge your partner or your partner‟s decision
making solely by the desirability of the consequences. It‟s following
a sound process that matters; smart choices are more likely to lead
to good consequences, but you‟ll get some bad ones, too

82


Making Style
 It‟s fair to ask, however, whether you fully anticipated the possible
consequences of your decisions. Did outcomes occur that you
never even thought of when you made your decision? You can‟t
think of everything, but if you find too many situations where you‟ve
completely missed something important, you aren‟t being
sufficiently thorough in defining your problem and in anticipating
consequences
 How can you improve? Practice. All skills require practice

83


(J) X. Take Charge of Your
Decision Making
 Decision problems are often dropped onto your shoulders by others
(competitors, bosses, family) or by circumstances (mother nature,
accidents, financial markets). Life would obviously be better if many
such problems disappeared
 To the extent possible, therefore, it is better to proactively create
your own decision problems. Decision problems created by you are
decision opportunities, not problems. (We all have a fundamental
interest in being healthy, for example). This is also the key to
achieving systematic innovation on a continuous basis
 The spark for identifying decision opportunities is clarifying
something that you want. There is a way to be systematic about
this. It‟s called value-focused thinking because it begins with your
values, what you hold to be of worth, useful, and desirable

84


(J) X. Take Charge of Your
Decision Making
 Begin by sitting down and defining a high-level set of objectives –
your values – specifying what you want from life or from some
aspect of it, such as your career, marriage, family, hobbies, or
whatever. For at-work decision making, define values for our
organization or your part of it
 Then use these values to seek out and create decision opportunities
 One particularly good way to take charge is to view your life as a
sequential decision problem – to think ahead
 Living is a balanced act between errors of two kinds: (a) being so
worried about the future not to enjoy the present; and, (b) to be so
involved in the present not to accumulate skills and intellectual
capital for the future. You should proactively guide yourself to your
own best balance

85


Summary
 This decision making approach offers you a more systematically
way to do what you do naturally every day
 Most tough decision problems have one, or maybe two, difficult
elements
 Many of your tough decisions aren‟t so hard as they look. By being
systematic and focusing on the hard parts, you can resolve them
comfortably
 Describing the problem, clarifying objectives, and coming up with
good alternatives form the foundation of good decisions. In well
over half of all decisions, a good job on these three elements will
lead quickly to a good decision
 Identifying and eliminating poor alternatives almost always provides
a big benefit, especially when they weren‟t obviously inferior at the
outset. This discipline keeps you from making a foolish
choice, ensures a good choice when differences among the
remaining alternatives are small, and often greatly simplifies the
decision
86


Summary (Continued)
 When there is uncertainty, you can‟t guarantee that good
consequences will result when you‟ve made a smart choice. But
over time, luck favours people who follow good decision making
procedures
 Most important, always remember: the only ay to exert control over
your life is through your decision making. The rest just happens to
you. Be proactive, take charge of your decision making, strive to
make good decisions and to develop good decision making habits –

YOU‟LL BE REWARDED WITH A FULLER, MORE SATISFYING LIFE!

87

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