A MODEL FOR DECISION-MAKING RISK

Answers the following Qs:

1) How do individual risk variables interact to create an overall decisionmaking risk?
2) Is there a comprehensive framework that can be used to assess
decision-making risk?
Two important models to understand certain components of risk:
1) The Multi-Level Model of Individual, Team, Organization and System
Levels
- AKA: The Triangle Model
- Emphasizes any factors that govern the relationships between the
indivual (leader/dec-maker), the team and the org/system (Situation or
environment)
- Helpful for considering the SYSTEMIC RISK that dec-makes face
o Systemic risk is generally used in reference to an event that
can trigger a collapse in a certain industry or economy,
whereas systematic risk refers to overall market risk.
2) The Knowledge-Intuition-Experience Model
- Highlights the dec-makers adaptability in making good decision
- Good starting pt for considering an orgs adaptabilitiy is to look at
interactions btwn knowledge, intuition and experience
Risk Variables that can affect the models above:
1 Overconfidence Bias - when you place too much faith in your own
knowledge and opinions. You may also believe that your contribution to
a decision is more valuable than it actually is.
How to Avoid Overconfidence Bias
Consider the following questions:
o What sources of information do you tend to rely on when you
make decisions? Are these fact-based, or do you rely on
hunches?
o Who else is involved in gathering information?
o Has information been gathered systematically?
- If you suspect that you might be depending on potentially
unreliable information, think about what you can do to
gather comprehensive, objective data.
2 Sunk Cost Effect - rational agents should not take irrecoverable or
sunk costs into account when making decisions about present or
future investments.
o inclines us to perpetuate the mistakes of the past.

3 Recency Effect - forming an opinion about an individual based on

your most recent interaction with that individual.
o This happens quite frequently in performance reviews.
o Dec-makers views of situations can be SKEWED causing them
to UNDERESTIMATE risks, or have UNREASONABLE expectations
o To avoid falling prey to this bias, keep great records and look at
the historical data not just your intuition when making
decisions.
Framework to help Leaders Quantify and Evaluate Risk:
1) Understand components affecting DMR
2) Determine how the use of the model can assist in analyzing existing business
cases
3) Understand how leaders can increase their likelihood of success by
leveraging the model
4) Leverage the above mentioned models to gain an understanding of the
interactions between them to identify the impact of each component on DMR
THE MODEL: (quantifying dec-making risk)
DMR = S + (1/A) x B
Where:
DMR = Dec-Making Risk
S = Systemic Risk risk cannot be reduced below this baseline level
A = Adaptability a leaders ability to reach appropriately to a
situation: can lead to strong team dynamics and leveraging the teams
strengths to overcome hurdles.
o An adaptable leader can think clearly and innovatively
Are able to call upon intuition, ingenuity to maker smart
decs even UNDER PRESSURE
Teams/orgs are adaptable when they have
More open info sharing and inclusion in decision
making
Reduction of power differentials among members
Psychological safety as they are more open to
sharing ideas in a safe space
B = Irrational Biases natural tendencies and learned behaviors can
lead to biased dec-making
Each variable must be >= ZERO
Systemic Risk Any form of intrinsic risk involved with a decision
(strategic, operational, organizational, financial, psychological, scientific
risks). External forces are also relevant (ex. competition, regulation, etc.).
Scale

1
2
3
4
5

Near-Certain Success
Likely Success
Equal Probability
Likely Failure
Near-Certain Failure

Irrational biases
Misconceptions that compound the systemic risk
(hence the multiplication)
Scale
1
2
3
4
5

Completely rational
Corrective
Cognizant
Considerable bias
Complete bias

Adaptability

Leaders ability to react appropriately to a situation

Scale
1
2
3
4
5

Inadaptable (Believes a certain way is right, and the only

way)
Recognition of problems (knows problems, doesnt feel need
to react)
Reactive (knows problems but is too late to react)
Constrained adaptability (Flexible, but flexibility is somewhat
constrained)
Adaptable (Adjusts thinking freely and early)

Gradient Chart

to B
Systemic risk is not relevant, so choice of team members is not critical
Leader should focus on reducing and eliminating bias within the team
Must be careful that because of low risk, they do not become
overconfident

to D
Team member selection still not critically important
Leader should focus on reducing bias, sustaining adaptability
Some risks are involved, more monitoring is needed

E to F
Medium level risk
Team member selection somewhat important choose ones with
experience
Group has some biases which may be costly
Break the norms to prevent rigidity
Make sure team recognizes and appreciates risk involved
G to H
Risk is fairly high
Leader should recruit team members who are very familiar to this
environment and have had success
Clear discussion of risks
Acting early to signs of danger
I

to J
Very high risk
Leader should consider whether or not to even pursue this endeavor
Team members should be the best in the field
Biases will be fatal, adaptability is essential to any form of success