12/7/2018 Decision Science Helps Boost Business


Decision Science Helps Boost Business
by Clayton Cafferata (/people/ClaytonCafferata), Senior Manager, Valuations Consulting

9/2017

No matter what size your company is—whether you’re a Fortune 100

company, a mid-sized closely held business, or an individual—you
face the same basic decision-making challenges. There’s often too
much information to contend with. This can lead to information
overload, or paralysis through analysis, and cause decision makers to
simply fall back on intuition; a course of action that doesn’t predictably
work.

Decision science can help businesses overcome these obstacles and

increase their value by creating a framework of more manageable, priority-based decisions that are founded on analytics
and lead to swift, calculated action.

Overcoming Biases
The scientific community has significantly evolved its understanding of human decision making and our predispositions to
cognitive biases, such as:

Optimism bias. The tendency to believe that we’re less likely to experience a negative event compared to others.

Confirmation bias. Why humans seek, understand, favor, and remember things in a way that confirms our
preexisting beliefs.

Availability heuristic. A mental shortcut our brains use which relies on immediate examples that come to mind
when evaluating a specific concept.

These are examples of factors that we know drive intuition-based decision making.

Today, there are more sophisticated methods available based on data, analytical techniques and decision modelling.

The key findings of a March 2017 McKinsey & Company study (http://www.mckinsey.com/business-functions/strategy-
and-corporate-finance/our-insights/where-how-much-and-how-answering-the-hardest-questions-of-resource-
allocation) of executive-level decision-making suggest that overcoming biases in resource allocation decisions are closely
correlated with value creation.

https://www.mossadams.com/articles/2017/september/decision-science-helps-boost-business 1/5
12/7/2018 Decision Science Helps Boost Business

The online survey was conducted April 12, 2016 – April 22, 2016, and received responses from 1,271 executives
representing a broad range of regions, industries, company sizes, and functional specialties. Less than half the
respondents agreed that their companies considered a range of potential outcomes or scenarios for a given investment,
and less than one-third reported using any of the common checks on biases other than scenario analysis.

The study further reports that companies making the most use of evidence-based decision making are 36% likelier to
report growing faster and 22% likelier to report higher profitability than peers who don’t.

Decision Modelling
Consider the results of another McKinsey study below which highlight that yet another challenge for decision makers is
how to begin to evaluate the alternatives.

When deciding whether or not to launch a new product, for example, the decision makers of a company may have to
consider factors such as the combined effects of the pricing level, configuration, packaging, which geographic areas to
target, as well as how and who will manufacture the product. Let’s say each of these six factors contains three possible
options. This would create 36— or 729—separate scenarios the company’s decision makers would need to consider.

When uncertainty, risk, and multiple competing objectives are added, it becomes increasingly difficult to keep track of all
the variables and analyze them effectively.

Attempting to reign in this complexity by testing every possible scenario leads to what’s commonly known as paralysis
through analysis—a state in which overthinking a situation leads to a specific decision or action never being taken.

This paralysis drives many action-oriented executives to turn to what they consider their most reliable decision-making
tool: their intuition. However, while following one’s intuition might seem to offer a simpler substitute to meticulous data
collection and analysis, it can be an unreliable and inconsistent tool on its own.

Decision models represent an object or system—including all of its properties or a subset of its properties. It enables the
people studying the models to make more accurate inferences about the hypothetical situations they represent and forms
part of a comprehensive framework for executive decision-making.

https://www.mossadams.com/articles/2017/september/decision-science-helps-boost-business 2/5
12/7/2018 Decision Science Helps Boost Business

The main purpose of decision modeling is perhaps best articulated in this quote from Lewis Carroll’s Alice in Wonderland:

“One day Alice came to a fork in the road and saw a Cheshire cat in a tree. ‘Which road do I take?’ she asked. ‘Where do you
want to go?’ was his response. ‘I don’t know,’ Alice answered. ‘Then,’ said the cat, ‘it doesn’t matter.”

As the famous quote suggests, if a decision-maker doesn’t know where they want to go, it’s too soon to be moving forward
with a detailed analysis of strategies or alternatives.

Once the complexity of the options under consideration are at a manageable level of detail—a level of detail permitting
analysis without paralysis, but also giving due consideration to uncertainties and risks—a business case or financial model
can be built to assess their values.

Financial Decision Models

Models in finance are like models in physics, economics, aerospace or car making. They attempt to emulate the behavior
and operation of real-world processes over time based on different variables—or potential actions an organization could
take—to create a relatively accurate representation of what could happen in the future.

Financial models aren’t perfect, but they provide insight into what can be expected and enable decision makers to
generate crucial inferences about real situations—providing valuable insight on the relationships between variables,
uncertainty, and helping to eliminate bad ideas.

Benefits
There are numerous examples of successful financial decision models, including models of retail customers’ behaviors to
pricing or packaging, or banks’ models for predicting a borrower’s credit risk. Models have also proven to be useful in fields
normally considered the domain of experts, such as predicting the quality of a vintage of wine.

More typical financial decision models can assist in deciding among alternative courses of action—be it related to project
costs, make or buy decisions, bidding decisions, or any of a number of other types of capital allocation decisions.

A quantitative, probabilistic model incorporating the appropriate information provides the ability to conduct simulations
that:

Study relationships between the options under consideration and the uncertainties on the objectives

Illuminate critical uncertainties, providing an opportunity to mitigate associated risks

Enumerate the opportunity costs or tradeoffs for choosing one option over another

This type of simulation is a versatile and widely used technique and can be performed using specialized software or
Microsoft Excel. It can be used to investigate almost any kind of uncertain business problem, such as:

Design and operation of queuing systems

Inventory systems management

https://www.mossadams.com/articles/2017/september/decision-science-helps-boost-business 3/5
12/7/2018 Decision Science Helps Boost Business

Estimates on the probability of completing a project on time

Design and operation of manufacturing systems

Design and operation of distribution systems

Financial risk analysis

We’re Here to Help

Decision science techniques don’t eliminate the problems of human intuition and biases; they serve to mitigate its
limitations. These techniques perform well in part because they rely on data, but also because they help overcome the
common biases that cloud human judgment.

If you’d like to learn more about how decision science could benefit your organization, contact your Moss Adams
professional.

Clayton Cafferata has provided valuation consulting services since 2005. His financial modeling experience includes
strategic initiatives, new business evaluations, simulations, and other ad hoc modeling. He can be reached at (206) 302-
6520 or clayton.cafferata@mossadams.com (mailto:clayton.cafferata@mossadams.com).

The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, tax, or
investment advice or opinion provided by Moss Adams LLP. This information is not intended to create, and receipt does not constitute, a legal
relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the
user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any
information presented. Moss Adams LLP assumes no obligation to provide notification of changes in tax laws or other factors that could affect
the information provided.

Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory services offered through Moss Adams Wealth Advisors
LLC. Investment banking offered through Moss Adams Capital LLC.

https://www.mossadams.com/articles/2017/september/decision-science-helps-boost-business 4/5
12/7/2018 Decision Science Helps Boost Business

https://www.mossadams.com/articles/2017/september/decision-science-helps-boost-business 5/5