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:VirtualSalt
Introduction to Decision Making
Robert Harris
Version Date: December 2, 2009
Previous versions: October 17, 2008; July 2, 1998

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We all make decisions of varying importance every day, so the idea that decision
making can be a rather sophisticated art may at first seem strange. However, st
udies have shown that most people are much poorer at decision making than they t
hink. An understanding of what decision making involves, together with a few eff
ective techniques, will help produce better decisions.
What is Decision Making?
Some Definitions
A good place to start is with some standard definitions of decision making.
1. Decision making is the study of identifying and choosing alternatives based o
n the values and preferences of the decision maker.
Making a decision implies that there are alternative choices to be considered, a
nd in such a case we want not only to identify as many of these alternatives as
possible but to choose the one that (1) has the highest probability of success o
r effectiveness and (2) best fits with our goals, desires, lifestyle, values, an
d so on.
2. Decision making is the process of sufficiently reducing uncertainty and doubt
about alternatives to allow a reasonable choice to be made from among them. Thi
s definition stresses the information-gathering function of decision making. It
should be noted here that uncertainty is reduced rather than eliminated. Very fe
w decisions are made with absolute certainty because complete knowledge about al
l the alternatives is seldom possible. Thus, every decision involves a certain a
mount of risk. If there is no uncertainty, you do not have a decision; you have
an algorithm--a set of steps or a recipe that is followed to bring about a fixed
result.
Kinds of Decisions
There are several basic kinds of decisions.
1. Decisions whether. This is the yes/no, either/or decision that must be made b
efore we proceed with the selection of an alternative. Should I buy a new TV? Sh
ould I travel this summer? Decisions whether are made by weighing reasons pro an
d con. The PMI technique discussed in the next chapter is ideal for this kind of
decision.
It is important to be aware of having made a decision whether, since too often w
e assume that decision making begins with the identification of alternatives, as
suming that the decision to choose one has already been made.
2. Decisions which. These decisions involve a choice of one or more alternatives
from among a set of possibilities, the choice being based on how well each alte
rnative measures up to a set of predefined criteria.
3. Contingent decisions. These are decisions that have been made but put on hold
until some condition is met.
For example, I have decided to buy that car if I can get it for the right price;
 I have decided to write that article if I can work the necessary time for it in
to my schedule. OR even, We'll take the route through the valley if we can contr
ol the ridge and if we detect no enemy activity to the north.
Most people carry around a set of already made, contingent decisions, just waiti
ng for the right conditions or opportunity to arise. Time, energy, price, availa
bility, opportunity, encouragement--all these factors can figure into the necess
ary conditions that need to be met before we can act on our decision. Some conti
ngent decisions are unstated or even exist below the awareness of the decision m
aker. These are the type that occur when we seize opportunity. We don't walk aro
und thinking, "If I see a new laser printer for $38, I'll buy it," but if we hap
pen upon a deal like that and we have been contemplating getting a new printer,
the decision is made quickly. Decisions made in sports and warfare are like this
. The best contingent and opportunistic decisions are made by the prepared mind-
-one that has thought about criteria and alternatives in the past.
Decision Making is a Recursive Process
A critical factor that decision theorists sometimes neglect to emphasize is that
in spite of the way the process is presented on paper, decision making is a non
linear, recursive process. That is, most decisions are made by moving back and f
orth between the choice of criteria (the characteristics we want our choice to m
eet) and the identification of alternatives (the possibilities we can choose fro
m among). The alternatives available influence the criteria we apply to them, an
d similarly the criteria we establish influence the alternatives we will conside
r. Let's look at an example to clarify this.
Suppose someone wants to decide, Should I get married? Notice that this is a dec
ision whether. A linear approach to decision making would be to decide this ques
tion by weighing the reasons pro and con (what are the benefits and drawbacks of
getting married) and then to move to the next part of the process, the identifi
cation of criteria (supportive, easy going, competent, affectionate, etc.). Next
, we would identify alternatives likely to have these criteria (Kathy, Jennifer,
Michelle, Julie, etc.). Finally we would evaluate each alternative according to
the criteria and choose the one that best meets the criteria. We would thus hav
e a scheme like this:
decision whether ... select criteria ... identify alternatives ... match criteri
a to alternatives ... make choice
However, the fact is that our decision whether to get married may really be a co
ntingent decision. "I'll get married if I can find the right person." It will th
us be influenced by the identification of alternatives, which we usually think o
f as a later step in the process. Similarly, suppose we have arrived at the "ide
ntify alternatives" stage of the process when we discover that Jennifer (one of
the girls identified as an alternative) has a wonderful personality characterist
ic that we had not even thought of before, but that we now really want to have i
n a wife. We immediately add that characteristic to our criteria. Thus, the deci
sion making process continues to move back and forth, around and around as it pr
ogresses in what will eventually be a linear direction but which in its actual w
orkings is highly recursive.
Key point, then, is that the characteristics of the alternatives we discover wil
l often revise the criteria we have previously identified.
The Components of Decision Making
The Decision Environment
Every decision is made within a decision environment, which is defined as the co
llection of information, alternatives, values, and preferences available at the
time of the decision. An ideal decision environment would include all possible i
nformation, all of it accurate, and every possible alternative. However, both in
formation and alternatives are constrained because the time and effort to gain i
nformation or identify alternatives are limited. The time constraint simply mean
s that a decision must be made by a certain time. The effort constraint reflects
the limits of manpower, money, and priorities. (You wouldn't want to spend thre
e hours and half a tank of gas trying to find the very best parking place at the
mall.) Since decisions must be made within this constrained environment, we can
say that the major challenge of decision making is uncertainty, and a major goa
l of decision analysis is to reduce uncertainty. We can almost never have all in
formation needed to make a decision with certainty, so most decisions involve an
undeniable amount of risk.
The fact that decisions must be made within a limiting decision environment sugg
ests two things. First, it explains why hindsight is so much more accurate and b
etter at making decisions that foresight. As time passes, the decision environme
nt continues to grow and expand. New information and new alternatives appear--ev
en after the decision must be made. Armed with new information after the fact, t
he hindsighters can many times look back and make a much better decision than th
e original maker, because the decision environment has continued to expand.
The second thing suggested by the decision-within-an-environment idea follows fr
om the above point. Since the decision environment continues to expand as time p
asses, it is often advisable to put off making a decision until close to the dea
dline. Information and alternatives continue to grow as time passes, so to have
access to the most information and to the best alternatives, do not make the dec
ision too soon. Now, since we are dealing with real life, it is obvious that som
e alternatives might no longer be available if too much time passes; that is a t
ension we have to work with, a tension that helps to shape the cutoff date for t
he decision.
Delaying a decision as long as reasonably possible, then, provides three benefit
s:
1. The decision environment will be larger, providing more information. There is
also time for more thoughtful and extended analysis.
2. New alternatives might be recognized or created. Version 2.0 might be release
d.
3. The decision maker's preferences might change. With further thought, wisdom,
and maturity, you may decide not to buy car X and instead to buy car Y.
And delaying a decision involves several risks:
1. As the decision environment continues to grow, the decision maker might becom
e overwhelmed with too much information and either make a poorer decision or els
e face decision paralysis.
2. Some alternatives might become unavailable because of events occurring during
the delay. In a few cases, where the decision was between two alternatives (att
ack the pass or circle around behind the large rock), both alternatives might be
come unavailable, leaving the decision maker with nothing. And we have all had t
he experience of seeing some amazing bargain only to hesitate and find that when
we go back to buy the item, it is sold out.
3. In a competitive environment, a faster rival might make the decision and gain
advantage. Another manufacturer might bring a similar product to market before
you (because that company didn't delay the decision) or the opposing army might
have seized the pass while the other army was "letting the decision environment
grow."
The Effects of Quantity on Decision Making
Many decision makers have a tendency to seek more information than required to m
ake a good decision. When too much information is sought and obtained, one or mo
re of several problems can arise. (1) A delay in the decision occurs because of
the time required to obtain and process the extra information. This delay could
impair the effectiveness of the decision or solution. (2) Information overload w
ill occur. In this state, so much information is available that decision-making
ability actually declines because the information in its entirety can no longer
be managed or assessed appropriately. A major problem caused by information over
load is forgetfulness. When too much information is taken into memory, especiall
y in a short period of time, some of the information (often that received early
on) will be pushed out.
The example is sometimes given of the man who spent the day at an information-he
avy seminar. At the end of the day, he was not only unable to remember the first
half of the seminar but he had also forgotten where he parked his car that morn
ing.
(3) Selective use of the information will occur. That is, the decision maker wil
l choose from among all the information available only those facts which support
a preconceived solution or position. (4) Mental fatigue occurs, which results i
n slower work or poor quality work. (5) Decision fatigue occurs where the decisi
on maker tires of making decisions. Often the result is fast, careless decisions
or even decision paralysis--no decisions are made at all.
The quantity of information that can be processed by the human mind is limited.
Unless information is consciously selected, processing will be biased toward the
first part of the information received. After that, the mind tires and begins t
o ignore subsequent information or forget earlier information. (Have you ever go
ne shopping for something where you looked at many alternatives--cars, knives, p
hones, TVs--only to decide that you liked the first one best?)
Decision Streams
A common misconception about decision making is that decisions are made in isola
tion from each other: you gather information, explore alternatives, and make a c
hoice, without regard to anything that has gone before. The fact is, decisions a
re made in a context of other decisions. The typical metaphor used to explain th
is is that of a stream. There is a stream of decisions surrounding a given decis
ion, many decisions made earlier have led up to this decision and made it both p
ossible and limited. Many other decisions will follow from it.
Another way to describe this situation is to say that most decisions involve a c
hoice from a group of preselected alternatives, made available to us from the un
iverse of alternatives by the previous decisions we have made. Previous decision
s have "activated" or "made operable" certain alternatives and "deactivated" or
"made inoperable" others.
For example, when you decide to go to the park, your decision has been enabled b
y many previous decisions. You had to decide to live near the park; you had to d
ecide to buy a car or learn about bus routes, and so on. And your previous decis
ions have constrained your subsequent ones: you can't decide to go to a park thi
s afternoon if it is three states away. By deciding to live where you do, you ha
ve both enabled and disabled a whole series of other decisions.
As another example, when you enter a store to buy a DVD player or TV, you are fa
ced with the preselected alternatives stocked by the store. There may be 200 mod
els available in the universe of models, but you will be choosing from, say, onl
y a dozen. In this case, your decision has been constrained by the decisions mad
e by others about which models to carry.
We might say, then, that every decision (1) follows from previous decisions, (2)
enables many future decisions, and (3) prevents other future decisions. People
who have trouble making decisions are sometimes trapped by the constraining natu
re of decision making. Every decision you make precludes other decisions, and th
erefore might be said to cause a loss of freedom. If you decide to marry Terry,
you no longer can decide to marry Shawn. However, just as making a decision caus
es a loss of freedom, it also creates new freedom, new choices and new possibili
ties. So making a decision is liberating as well as constraining. And a decision
left unmade will often result in a decision by default or a decision being made
for you.
It is important to realize that every decision you make affects the decision str
eam and the collections of alternatives available to you both immediately and in
the future. In other words, decisions have far reaching consequences.
Concepts and Definitions
1. Information. This is knowledge about the decision, the effects of its alterna
tives, the probability of each alternative, and so forth. A major point to make
here is that while substantial information is desirable, the statement that "the
more information, the better" is not true. Too much information can actually re
duce the quality of a decision. See the discussion on The Effects of Quantity on
Decision Making above.
2. Alternatives. These are the possibilities one has to choose from. Alternative
s can be identified (that is, searched for and located) or even developed (creat
ed where they did not previously exist). Merely searching for preexisting altern
atives will result in less effective decision making.
3. Criteria. These are the characteristics or requirements that each alternative
must possess to a greater or lesser extent. Usually the alternatives are rated
on how well they possess each criterion. For example, alternative Toyota ranks a
n 8 on the criterion of economy, while alternative Buick ranks a 6 on the same c
riterion.
4. Goals. What is it you want to accomplish? Strangely enough, many decision mak
ers collect a bunch of alternatives (say cars to buy or people to marry) and the
n ask, "Which should I choose?" without thinking first of what their goals are,
what overall objective they want to achieve. Next time you find yourself asking,
"What should I do? What should I choose?" ask yourself first, "What are my goal
s?"
A component of goal identification should be included in every instance of decis
ion analysis.
5. Value. Value refers to how desirable a particular outcome is, the value of th
e alternative, whether in dollars, satisfaction, or other benefit.
6. Preferences. These reflect the philosophy and moral hierarchy of the decision
maker. We could say that they are the decision maker's "values," but that might
be confusing with the other use of the word, above. If we could use that word h
ere, we would say that personal values dictate preferences. Some people prefer e
xcitement to calmness, certainty to risk, efficiency to esthetics, quality to qu
antity, and so on. Thus, when one person chooses to ride the wildest roller coas
ter in the park and another chooses a mild ride, both may be making good decisio
ns, if based on their individual preferences.
7. Decision Quality. This is a rating of whether a decision is good or bad. A go
od decision is a logical one based on the available information and reflecting t
he preferences of the decision maker.
The important concept to grasp here is that the quality of a decision is not rel
ated to its outcome: a good decision can have either a good or a bad outcome. Si
milarly, a bad decision (one not based on adequate information or not reflecting
the decision maker's preferences) can still have a good outcome.
For example, if you do extensive analysis and carefully decide on a certain inve
stment based on what you know about its risks and your preferences, then your de
cision is a good one, even though you may lose money on the investment. Similarl
y, if you throw a dart at a listing of stocks and buy the one the dart hits, you
r decision is a bad one, even though the stock may go up in value.
Good decisions that result in bad outcomes should thus not be cause for guilt or
recrimination. If you decide to take the scenic route based on what you know of
the road (reasonably safe, not heavily traveled) and your preferences (minimal
risk, prefer scenery over early arrival), then your decision is a good one, even
though you might happen to get in an accident, or have a flat tire in the middl
e of nowhere. It is not justified to say, "Well, this was a bad decision."
In judging the quality of a decision, in addition to the concerns of logic, use
of information and alternatives, three other considerations come into play:
A. The decision must meet the stated objectives most thoroughly and completely.
How well does the alternative chosen meet the goals identified?
B. The decision must meet the stated objectives most efficiently, with concern o
ver cost, energy, side effects. Are there negative consequences to the alternati
ve that make that choice less desirable? We sometimes overlook this consideratio
n in our search for thrills.
C. The decision must take into account valuable byproducts or indirect advantage
s. A new employee candidate may also have extra abilities not directly related t
o the job but valuable to the company nonetheless. These should be taken into ac
count.
8. Acceptance. Those who must implement the decision or who will be affected by
it must accept it both intellectually and emotionally.
Acceptance is a critical factor because it occasionally conflicts with one of th
e quality criteria. In such cases, the best thing to do may be to choose a lesse
r quality solution that has greater acceptance.
For example, when cake mixes first were put on the market, manufacturers put eve
rything into the mix--the highest quality and most efficient solution. Only wate
r had to be added. However, the mixes didn't sell well--they weren't accepted. A
fter investigation, the makers discovered that women didn't like the mixes becau
se using the mixes made them feel guilty: they weren't good wives because they w
ere taking a shortcut to making a cake. The solution was to take the egg and som
etimes the milk out of the mix so that the women would have something to do to "
make" the cake other than just adding water. Now they had to add egg and perhaps
milk, making them feel more useful. The need to feel useful and a contributor i
s one of the most basic of human needs. Thus, while the new solution was less ef
ficient in theoretical terms, it was much more acceptable. Cake mixes with the n
ew formula became quite popular.
Thus, the inferior method may produce greater results if the inferior one has gr
eater support. One of the most important considerations in decision making, then
, is the people factor. Always consider a decision in light of the people implem
entation.
A decision that may be technologically brilliant but that is sociologically stup
id will not work. Only decisions that are implemented, and implemented with thor
oughness (and preferably enthusiasm) will work the way they are intended to.
Approaches to Decision Making
There are two major approaches to decision making in an organization, the author
itarian method in which an executive figure makes a decision for the group and t
he group method in which the group decides what to do.
1. Authoritarian. The manager makes the decision based on the knowledge he can g
ather. He then must explain the decision to the group and gain their acceptance
of it. In some studies, the time breakdown for a typical operating decision is s
omething like this:
make decision, 5 min.; explain decision, 30 min.; gain acceptance, 30 min.
2. Group. The group shares ideas and analyses, and agrees upon a decision to imp
lement. Studies show that the group often has values, feelings, and reactions qu
ite different from those the manager supposes they have. No one knows the group
and its tastes and preferences as well as the group itself. And, interestingly,
the time breakdown is something like this:
group makes decision, 30 min.; explain decision, 0 min.; gain acceptance, 0 min.

Clearly, just from an efficiency standpoint, group decision making is better. Mo

re than this, it has been shown many times that people prefer to implement the i
deas they themselves think of. They will work harder and more energetically to i
mplement their own idea than they would to implement an idea imposed on them by
others. We all have a love for our own ideas and solutions, and we will always w
ork harder on a solution supported by our own vision and our own ego than we wil
l on a solution we have little creative involvement with.
There are two types of group decision making sessions. First is free discussion
in which the problem is simply put on the table for the group to talk about. For
example, Joe has been offered a job change from shift supervisor to maintenance
foreman. Should he take the job?
The other kind of group decision making is developmental discussion or structure
d discussion. Here the problem is broken down into steps, smaller parts with spe
cific goals. For example, instead of asking generally whether Joe should take th
e job, the group works on sub questions: What are Joe's skills? What skills does
the new job require? How does Joe rate on each of the skills required? Notice t
hat these questions seek specific information rather than more general impressio
nistic opinions.
Developmental discussion (1) insures systematic coverage of a topic and (2) insu
res that all members of the group are talking about the same aspect of the probl
em at the same time.
Some Decision Making Strategies
As you know, there are often many solutions to a given problem, and the decision
maker's task is to choose one of them. The task of choosing can be as simple or
as complex as the importance of the decision warrants, and the number and quali
ty of alternatives can also be adjusted according to importance, time, resources
and so on. There are several strategies used for choosing. Among them are the f
ollowing:
1. Optimizing. This is the strategy of choosing the best possible solution to th
e problem, discovering as many alternatives as possible and choosing the very be
st. How thoroughly optimizing can be done is dependent on
A. importance of the problem
B. time available for solving it
C. cost involved with alternative solutions
D. availability of resources, knowledge
E. personal psychology, values
Note that the collection of complete information and the consideration of all al
ternatives is seldom possible for most major decisions, so that limitations must
 be placed on alternatives.
2. Satisficing. In this strategy, the first satisfactory alternative is chosen r
ather than the best alternative. If you are very hungry, you might choose to sto
p at the first decent looking restaurant in the next town rather than attempting
to choose the best restaurant from among all (the optimizing strategy). The wor
d satisficing was coined by combining satisfactory and sufficient. For many smal
l decisions, such as where to park, what to drink, which pen to use, which tie t
o wear, and so on, the satisficing strategy is perfect.
3. Maximax. This stands for "maximize the maximums." This strategy focuses on ev
aluating and then choosing the alternatives based on their maximum possible payo
ff. This is sometimes described as the strategy of the optimist, because favorab
le outcomes and high potentials are the areas of concern. It is a good strategy
for use when risk taking is most acceptable, when the go-for-broke philosophy is
reigning freely.
4. Maximin. This stands for "maximize the minimums." In this strategy, that of t
he pessimist, the worst possible outcome of each decision is considered and the
decision with the highest minimum is chosen. The Maximin orientation is good whe
n the consequences of a failed decision are particularly harmful or undesirable.
Maximin concentrates on the salvage value of a decision, or of the guaranteed r
eturn of the decision. It's the philosophy behind the saying, "A bird in the han
d is worth two in the bush."
Quiz shows exploit the uncertainty many people feel when they are not quite sure
whether to go with a maximax strategy or a maximin one: "Okay, Mrs. Freen, you
can now choose to take what you've already won and go home, or risk losing it al
l and find out what's behind door number three."
Example: I could put my $10,000 in a genetic engineering company, and if it crea
tes and patents a new bacteria that helps plants resist frost, I could make $50,
000. But I could also lose the whole $10,000. But if I invest in a soap company,
I might make only $20,000, but if the company goes completely broke and gets li
quidated, I'll still get back $7,000 of my investment, based on its book value.
Example: It's fourth down and ten yards to go on your twenty yard line. Do you g
o for a long pass or punt? Maximax would be to pass; Maximin would be to punt.
Decision Making Procedure
As you read this procedure, remember our discussion earlier about the recursive
nature of decision making. In a typical decision making situation, as you move f
rom step to step here, you will probably find yourself moving back and forth als
o.
1. Identify the decision to be made together with the goals it should achieve. D
etermine the scope and limitations of the decision. Is the new job to be permane
nt or temporary or is that not yet known (thus requiring another decision later)
? Is the new package for the product to be put into all markets or just into a t
est market? How might the scope of the decision be changed--that is, what are it
s possible parameters?
When thinking about the decision, be sure to include a clarification of goals: W
e must decide whom to hire for our new secretary, one who will be able to create
an efficient and organized office. Or, We must decide where to go on vacation,
where we can relax and get some rest from the fast pace of society.
2. Get the facts. But remember that you cannot get all the facts. Get as many fa
cts as possible about a decision within the limits of time imposed on you and yo
ur ability to process them, but remember that virtually every decision must be m
ade in partial ignorance. Lack of complete information must not be allowed to pa
ralyze your decision. A decision based on partial knowledge is usually better th
an not making the decision when a decision is really needed. The proverb that "a
ny decision is better than no decision," while perhaps extreme, shows the import
ance of choosing. When you are racing toward a bridge support, you must decide t
o turn away to the right or to the left. Which way you turn is less important th
an the fact that you do indeed turn.
As part of your collection of facts, list your feelings, hunches, and intuitive
urges. Many decisions must ultimately rely on or be influenced by intuition beca
use of the remaining degree of uncertainty involved in the situation.
Also as part of your collection of facts, consult those who will be affected by
and who will have to implement your decision. Input from these people not only h
elps supply you with information and help in making the decision but it begins t
o produce the acceptance necessary in the implementers because they feel that th
ey are part of the decision making process. As Russell Ackoff noted in The Art o
f Problem Solving, not consulting people involved in a decision is often perceiv
ed as an act of aggression.
3. Develop alternatives. Make a list of all the possible choices you have, inclu
ding the choice of doing nothing. Not choosing one of the candidates or one of t
he building sites is in itself a decision. Often a non decision is harmful as we
mentioned above--not choosing to turn either right or left is to choose to driv
e into the bridge. But sometimes the decision to do nothing is useful or at leas
t better than the alternatives, so it should always be consciously included in t
he decision making process.
Also be sure to think about not just identifying available alternatives but crea
ting alternatives that don't yet exist. For example, if you want to choose which
major to pursue in college, think not only of the available ones in the catalog
, but of designing your own course of study.
4. Rate each alternative. This is the evaluation of the value of each alternativ
e. Consider the negative of each alternative (cost, consequences, problems creat
ed, time needed, etc.) and the positive of each (money saved, time saved, added
creativity or happiness to company or employees, etc.). Remember here that the a
lternative that you might like best or that would in the best of all possible wo
rlds be an obvious choice will, however, not be functional in the real world bec
ause of too much cost, time, or lack of acceptance by others.
Also don't forget to include indirect factors in the rating. If you are deciding
between machines X, Y, and Z and you already have an employee who knows how to
operate machine Z, that fact should be considered. If you are choosing an invest
igative team to send to Japan to look at plant sites and you have very qualified
candidates A, B, and C, the fact that B is a very fast typist, a superior photo
grapher or has some other side benefit in addition to being a qualified team mem
ber, should be considered. In fact, what you put on your hobbies and interests l
ine on your resume can be quite important when you apply for a job just because
employers are interested in getting people with a good collection of additional
abilities.
5. Rate the risk of each alternative. In problem solving, you hunt around for a
solution that best solves a particular problem, and by such a hunt you are prett
y sure that the solution will work. In decision making, however, there is always
some degree of uncertainty in any choice. Will Bill really work out as the new
supervisor? If we decide to expand into Canada, will our sales and profits reall
y increase? If we let Jane date Fred at age fifteen, will the experience be good
? If you decide to marry person X or buy car Y or go to school Z, will that be t
he best or at least a successful choice?
Risks can be rated as percentages, ratios, rankings, grades or in any other form
that allows them to be compared. See the section on risk evaluation for more de
tails on risking.
6. Make the decision. If you are making an individual decision, apply your prefe
rences (which may take into account the preferences of others). Choose the path
to follow, whether it includes one of the alternatives, more than one of them (a
multiple decision) or the decision to choose none.
And of course, don't forget to implement the decision and then evaluate the impl
ementation, just as you would in a problem solving experience.
One important item often overlooked in implementation is that when explaining th
e decision to those involved in carrying it out or those who will be affected by
it, don't just list the projected benefits: frankly explain the risks and the d
rawbacks involved and tell why you believe the proposed benefits outweigh the ne
gatives. Implementers are much more willing to support decisions when they (1) u
nderstand the risks and (2) believe that they are being treated with honesty and
like adults.
Remember also that very few decisions are irrevocable. Don't cancel a decision p
rematurely because many new plans require time to work--it may take years for yo
ur new branch office in Paris to get profitable--but don't hesitate to change di
rections if a particular decision clearly is not working out or is being somehow
harmful. You can always make another decision to do something else.

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Risking
Because making decisions involves a degree of risk, it would be helpful to exami
ne risk and risk analysis in this chapter in order to gain an understanding of w
hat is involved. Risk and uncertainty create anxiety, yet they are necessary com
ponents of an active life.
General Comments on Risk Taking
1. Only the risk takers are truly free. All decisions of consequence involve ris
k. Without taking risks, you cannot grow or improve or even live.
2. There is really no such thing as permanent security in anything on earth. Not
taking risks is really not more secure than taking them, for your present state
can always be changed without action on your part. If you don't take the risk o
f dying by driving to the store, your house could collapse on you and kill you a
nyway.
3. You are supposed to be afraid when you risk. Admit your fears--of loss, of re
jection, of failure.
4. Risking normally involves a degree of separation anxiety--the anxiety you fee
l whenever you are removed from something that makes you feel secure. Many child
ren feel this when they first leave their parents for school. Some college stude
nts feel this when they go off to college. Travelers sometimes feel it when they
get homesick. The way to overcome separation anxiety is to build a bridge betwe
en the familiar and secure and the new. Find out what the new place--school or c
ountry--is like and how its elements compare to familiar and secure things at ho
me. Take familiar things with you--books, teddy bear, popcorn popper, whatever.
The same is true of all risks. Make the opportunity as familiar as possible and
learn as much about it as you can before you release the security of the old. Fi
nd out about the new job, its location, the lifestyle of those who live there, a
nd so on.
The Orthodox Theory of Risk Evaluation
The traditional strategy for evaluating risks is to use an expected value calcul
ation, based on the simple idea that the expected value of a risk is the value o
f the possible outcome discounted by the probability of its realization. The for
mula is EV=PR or expected value equals prize times risk (or chance). Thus, if yo
u have one chance in a million of winning a million dollars, your expected value
is one dollar (which is one millionth of a million dollars). Expected value cal
culations are often used when comparing an amount of money to be invested with t
he probable payoff. (Note: if the risk is, for example, one in twenty, you can d
ivide the prize by twenty, which is the same as multiplying the prize by one twe
ntieth.)
Let's take a typical state lottery, for example. The investment for a ticket is
a dollar. The usual prize is about $6,500,000 and the chance of winning is about
one in 14,800,000. By discounting the possible outcome by the chance of winning
(dividing $6.5 million by 14.8 million), we discover that the expected value of
the lottery ticket is about 43.9 cents. Since a ticket costs $1.00 (more than t
wice as much as its expected value), we would conclude that this is a poor risk.
Only when the expected value meets or exceeds the required expense is the risk
considered worth taking, according to this theory.
______________________________________________________________________
Try It Yourself
Expected Value. Calculate the expected value of each of the following risks. Div
ide the prize by the chance, and compared the answer with the cost of the ticket
to decide whether the risk is worth taking.
1. Irish Sweepstakes. Ticket: $2.50 Prize: $100,000,000 Chance: 1 in 60,000,000
2. State Lottery. Ticket: $1.00 Prize: $42,300,000 Chance: 1 in 14,800,000 (Note
: Calculate the expected value for just a single winner and for the number of wi
nners you'd expect based on 80,000,000 entries.)
3. Reader's Digest Sweepstakes. Ticket: 32 cent stamp to return the entry Prize:
$6,000,000 Chance: 1 in 256,000,000
4. Publisher's Clearinghouse Sweepstakes. Ticket: 32 cent stamp to return the en
try Prize: $10,000,000 Chance: 1 in 140,000,000
5. Charity Raffle. Ticket: $5.00 Prize: $12,400 (new car) Chance: 1 in 3,000
6. Vegas Roulette #1. Ticket: $20 bet Prize: $380 Chance: 1 in 35
7. Reno Roulette #2 Ticket: $25 bet Prize: $975 Chance: 1 in 35
8. Pearl in Oyster Ticket: $10 Prize: $50 Chance: 1 in 8
9. Extended Warranty Ticket (Price of Extended Warranty): $45 Prize (Cost of ave
rage covered warranty repair): $180 Chance: 1 in 12
10. In Your Dreams Ticket: $1.00 Prize: $500,000 Chance: 1 in 250
______________________________________________________________________
Many risks have multiple possible outcomes, each outcome with its own probabilit
y of occurrence and its own value. The expected value of a given decision in suc
h cases is the sum of all the values of each outcome, each diminished by its ind
ividual probability. The formula is
EV = sumn (pn x rn)
where p is the probability and r is the reward or value of the risk. Note in the
following examples that the value of an outcome is represented numerically, but
it does not need to represent dollars, or even physical units. A 10 could be un
its of happiness, pleasure, pain, embarrassment, and so forth, as well as dollar
s.
Example: Should I go scuba diving this weekend? If I do, there is a ninety perce
nt probability that I will have a lot of fun. I quantify this great fun as 10 fu
n points. There is also a ten percent probability that I will get hurt, which I
quantify as minus 20 fun points. If I make the other decision, to stay home, the
re is a ninety-nine percent probability that I will be bored, represented by a m
inus 2 fun points, and a one percent probability that something exciting will ha
ppen, which I represent as five fun points (half as exciting as going scuba divi
ng). Our expected value worksheet looks like this:
Probability Reward
_____ .9 x +10 = +9
|
|_____ .1 x -20 = -2
Y|
_Scuba?_| Total = 7
N|
|_____ .99 x -2 = -1.98
|
|_____ .01 x +5 = + .05
Total = -1.93
Here we see that the expected value of going diving is 7, which is much higher t
han the expected value of staying home, which is a negative 1.93.
As another example, suppose I'm trying to decide whether or not to attempt a rep
air on my computer or whether to have a dealer fix it. If I attempt the repair,
there are three possible outcomes. One is that I'll succeed, which I value both
financially, experientially, and egotistically, so I give that a +10. Second is
that I will increase the cost of repairing the computer by damaging something. T
his I rate at -8. The third possibility is that I will ruin the computer and be
totally humiliated. This I rate at -20. The probability I see for each of these
possibilities is, in order, 50%, 30%, and 20%. Do note that for any given decisi
on, the probabilities of all possible outcomes must add up to 100%.
On the other hand, if I have a dealer repair the computer, there are two possibi
lities. One is that it will cost a modest amount of money, which I rate at a -2,
since I will be out a few bucks and will have to haul the computer into the sho
p and back. The other possibility is that the repair will cost major money, whic
h I rate at a -9. The probabilities for each of these I predict at 20% for a che
ap repair and 80% for an expensive one. Our EV worksheet would then look like th
is:
Probability Reward
_____ .5 x +10 = +5
|
|_____ .3 x -8 = -2.4
|
|_____ .2 x -20 = -4
Y|
Me Fix?_| Total -1.4
N|
|_____ .8 x -9 = -7.2
|
|_____ .2 x -2 = -0.4
Total -7.6
Here we see that both expected values are negative, meaning that this decision w
ill probably result in discomfort either way. However, the expected value for do
ing the repair is "higher" (less negative) than that for having the dealer do it
, so that is the way our calculations tell us to go. Note, of course, that if we
decide our probabilities are different, or if we decide that our rewards are di
fferent, the expected values will change.
______________________________________________________________________
Try It Yourself
Expected Value. Work out each of these for expected value and determine which de
cision is best. Partial answers at the end.
1. You want to decide whether or not to take the freeway home from an event you'
ve attended. From experience, you calculate that if you take the freeway, you wi
ll either speed home, which you rate at a +8 on the happiness scale, or you will
get into a traffic jam, which you rate at a -6 on the happiness scale. If you t
ake the side streets, you will either get home okay, which is a +4 on the happin
ess scale (since it's only half as fast as the freeway) or you will hit another
traffic jam, which you rate as a -7, slightly worse than a jam on the freeway. T
he probability of a freeway jam is 60% (you'll have to figure out the probabilit
y for speeding home). The probability for getting home okay on the side streets
is 30%.
2. Your crop of cotton is infested with insects and you want to decide which pes
ticide to use. Some of the insects are probably resistant to the different avail
able pesticides, so you sit down and figure out the following probabilities. If
you use ToxiBug, there is a 22% probability that it will kill 95% of the bugs on
your crops. There is a 49% probability that it will kill only 71% of the bugs,
and a 29% probability that it will kill only 43% of the bugs. (Use the bug perce
ntages as reward numbers, so that 95% is a reward of 95.)
If you use Bug-O-Kill, there is a 71% probability that it will kill 90% of the b
ugs, a 24% probability that it will kill 11% of the bugs, and a 5% probability t
hat it will kill 19% of the bugs.
If you use MegaDeath Bug Viability Terminator, there is a 90% chance that 60% of
the bugs will be killed, and a 10% chance that 5% will be killed.
3. You have been retained by Amalgamated Pencil Sharpeners, Inc. to help determi
ne whether the company should export its new sharpener model XT-S to Brazil. If
APS does export, there are three foreseen possibilities. First, there is a 25% p
robability that the product will sell well, earning the company (after startup c
osts) $280,000. Second, there is a 40% probability that the sharpeners will have
only modest performance, earning the company a net of only $15,000. Lastly, the
product might be rejected, causing the company to lose its startup costs of $17
5,000. The probability for this is 35%.
If the company decides not to export the sharpeners, it could invest the startup
money with a 90% probability of making a net of $18,000 and a 10% probability o
f losing a net of $27,000.
What should the company do?
4. As a diving buff, you have been asked to help salvage a sunken treasure ship
off the coast of Florida. Your only problem is an abundance of riches: There are
three ships to choose from. And, to make life interesting, there is a little un
certainty about whether each has already been salvaged. (If the ship has already
been salvaged, there will be no treasure at all left, and the attempt will resu
lt in a net loss equal to the cost of mounting the expedition.) Judging by the r
ecords of each ship's inventory and the probability of previous salvaging, you h
ave this information:
If you salvage the Jacques D'Ambois, there is a 60% probability of finding the $
20,000,000 in gold and silver bars on board. Cost of salvaging this wreck is $5,
000,000.
If you salvage the Acana, there is a 75% probability of finding $11,000,000 in d
oubloons and jewels. Cost of salvaging this wreck is $3,000,000.
If you salvage the Princess Avanti, there is a 20% probability of finding $30,00
0,000 in gold and a 25% probability of finding only $15,000,000. Cost of salvagi
ng this wreck is $4,000,000.
Hint: Subtract the cost of salvaging from the hoped for return in each case. Sub
tract the probability of success from 100% to find the probability of failure. F
ailure results in the expense of salvaging (a net loss).
Which ship should be salvaged?
5. Penelope has a serious illness for which doctors have recommended surgery. If
she has the operation, there is a 60% chance she will recover and live another
50 years. There is a 20% chance she will live only 20 more years. And there is a
20% percent chance that she will die on the operating table or shortly thereaft
er. If she does not have the operation, there is a 60% chance that she will live
only five years. There is a 15% percent chance that she will live 15 years. And
there is a 25% chance that she will spontaneously recover and live 50 years. Fo
r each case, let the number of years to live equal the possible reward. For the
possibility of dying on the operating table, make that equal to a negative of th
e expected value of not having the operation at all (so calculate the not having
the operation EV first).
Should she have the operation?
6. You have $250,000 to invest for a year. If you put it in stocks, there is a 5
0 percent chance that you will net a return of $40,000. There is, however a 20 p
ercent chance that you'll lose $2,000 and a 30 percent chance that the market wi
ll really decline and you'll lose $50,000.
If you put the money in the bank, there is a 95 percent chance that you'll earn
$17,500 in interest. There is, however, just a small chance--5 percent--that the
bank will go broke, and since the FDIC insurance covers only $100,000, you woul
d lose $150,000.
Which investment has the highest expected value?
7. You are trying to decide between three used cars, all of which are priced the
same. If you buy used car number one, there is a 70 percent probability that yo
u'll have to spend $400 to get the engine back in shape. However, there is a 30
percent probability that the engine will have to be replaced, which will cost yo
u $2,000.
If you choose car number 2, there is a 50 percent probability that you won't hav
e to spend any money at all, a 30 percent probability that emission repairs will
cost only $200, but there is a 20 percent chance that the car will require a Ca
lifornia smog conversion (since it may be a European import that hasn't been bui
lt for California). This will cost you $5000.
If you choose car number three, you will face a 60 percent probability of an $80
0 transmission repair, a 35 percent probability of a small transmission adjustme
nt, and a 5 percent possibility that you'll need to spend $1600 to fix the engin
e and the transmission.
Which car should you buy? Consider the costs as negative values and choose the o
ne with the lowest negative total.
8. Your true love comes up to you and says, "Darling, I can't decide whether we
should go to the beach or to a movie, because while the beach would be twice as
much fun if it doesn't rain, there is a 30 percent chance of rain today. And if
it rains, the beach would be no fun at all." You smile knowingly and reply, "Wel
l, sweetheart, I just happen to know how to calculate expected values. I'll solv
e the problem for us." If the fun you would have at the beach is a 10, what shou
ld you decision be?
______________________________________________________________________
Advice on Risking
1. Decide whether the risk is necessary or desirable. Spend some careful thought
before acting, so that you will not end up taking unnecessary risks.
2. Risk for the right reasons and when you are calm and thoughtful. Don't take a
risk because you are angry, hurt, depressed, desperate, or frightened. Don't ta
ke risks just to get revenge or to harm someone else. Don't risk when you are in
capable of rational thought.
3. Have a goal. When you take a risk, have a clear purpose in mind so that you w
ill know, after the fact, whether you succeeded or not. What will taking the ris
k accomplish?
4. Determine the possible loss as well as the gain. That is, know exactly what t
he consequences of failure will be. Unless you know pretty accurately what both
loss and gain will be, you do not understand the risk. There is a tendency eithe
r to underestimate or to overestimate the consequences of risk. Underestimation
can result in surprising damage, cost, setbacks, pain, whatever. But overestimat
ion is just as problematic, because it can keep us from taking the risks we shou
ld be taking. Many times, upon reflection, the worst case event of a failed risk
is much less harmful or negative that we originally believed.
It's a good idea in fact to list all the good expected effects of a successful o
utcome and all the bad expected effects of an unsuccessful outcome.
5. Try to make an accurate estimate about the probability of each case. Is the p
robability of success one in two, one in ten, one in a hundred, one in a million
? This can be sometimes difficult to do, but usually you can guess the probabili
ty within an order of magnitude.
6. When possible, take one risk at a time. Divide your actions or goals wherever
possible so that you are not combining risks unless absolutely necessary. Simul
taneous risking increases anxiety, creates confusion, and makes failure analysis
very difficult.
7. Use imaging or role playing to work through the various possibilities, succes
ses and failures, so that you will be mentally prepared for any outcome. Think a
bout what can go right and what can go wrong and how you will respond to or adju
st to each possibility.
8. Use a plan. Set up a timetable with a list of steps to take. Use the plan as
a guideline, but be flexible.
9. Act decisively. When you have evaluated the risk and decided that it's worth
it, act. Go for it. Don't hesitate at the threshold or halfway through. Once you
get going, be courageous. Grit your teeth and move forward. Don't procrastinate
and don't act half heartedly.
10. Don't expect complete success. You may get it, of course, but chances are th
e result of your risk will not be exactly what you had imagined and there will b
e more a degree of success than absolute success or failure.
Risk Management Strategies
In order of precedence, the strategies are:
1. Dismiss extremely remote or unrealistic possibilities. For example, in the de
cision, Shall I go to the store? there are risks like dying on the freeway, bein
g shot by robbers, buying poisoned food, and so forth, but these should not norm
ally enter into the risk evaluation because they are highly if not extremely imp
robable. Remember that all life is accompanied by risk. Ten thousand television
sets catch fire each year, a hundred thousand people walk through plate glass ea
ch year, 125,000 do-it-yourselfers injure themselves with power tools each year,
70,000 children are injured by toys each year, ten thousand people are poisoned
by aspirin each year. But what are we willing to give up? Some of these are not
really remote, but we are willing to take the risk. E.g. automobile deaths. 1 c
hance in 4000 each year of dying.
And of course whenever you trust someone, you risk betrayal; when you open yours
elf, you risk exploitation or ridicule; whenever you hand over a dollar, you ris
k being defrauded.
2. Insofar as possible, avoid catastrophes. If there is a small but significant
chance for catastrophe, then the regular expected value calculations may not app
ly.
A major principle of risk management is to avoid any real risk of catastrophe at
any reasonable cost. The difficulty of applying this principle comes from the u
ncertainty of what is a real risk and what is a reasonable cost.
3. Recognize the tradeoffs. Remember that every action of life has some risk to
it. Even when we don't take the risk upon ourselves, risk is often put upon us b
y the nature of life and society. Eating you risk food poisoning or choking, but
you have to eat or you'll die. Socializing you risk disease, driving or flying
you risk crashing, but in some sense you have to socialize and travel. Lying in
the sun you risk skin cancer; smoking you risk lung cancer; eating French fries
you risk heart disease.
Don't deny the risks involved in living and don't worry excessively about the co
nsequences of modern life.
4. Maximize Expected Values. Normally, the expected value of each alternative sh
ows its relative preferability. That is, you are opting for the greatest probabi
lity of the greatest good. Remember, though, that these calculations are guides,
and are based on what may be very subjective probabilities and rewards. You are
not "required by law" to choose any particular alternative. If you believe that
the alternative with the highest EV is a poor choice, you should reconsider the
probabilities and rewards you have assigned to all the alternatives.
With these ideas in mind, you'll better understand why some people pursue danger
ous sports like skiing, sky diving, race car driving and so forth. The risk/bene
fit ratio is acceptable to them. It may be useful to note here, too, that most p
eople are not rational risk takers. They take some risks all out of proportion t
o any expected return and avoid other risks that have a large expected value com
pared to the risk.

--------------------------------------------------------------------------------
Answers to Expected Value Questions:
1. The freeway at -.4 is less negative than side roads.
2. Toxibug at 68.16.
3. Export at 14.75.
4. Jacques D'Ambois at 7.
5. Operate at 30.45.
6. Put it in the bank at 9.125.
7. Car #3 at $595.
8. Go to the beach at 7.
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Other Tools for Creative Thinking and Problem Solving
Critical Thinking Course Homepage
Introduction to Creative Thinking
Creative Thinking Techniques
Criteria for Evaluating a Creative Solution
Introduction to Problem Solving
Human-Factor Phenomena in Problem Solving
Problem Solving Techniques
Biases Affecting Information Processing
Decision Making Techniques
Decision Simplification Techniques
Difficulties Created by the Videographic Presentation of Information
Why Are We So Busy?
Truths of the Information Age

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Robert Harris is a writer and educator with more than 25 years of teaching exper
ience at the college and university level. RHarris at virtualsalt.com