Smart Choices

by Howard Raiffa

  Making wise tradeoffs is one of the most important and most difficult challenges in decision making. The more alternatives you’re considering and the more objectives you’re pursuing, the more tradeoffs you’ll need to make. The sheer volume of tradeoffs, though, isn’t what makes decision making so hard. It’s the fact that each objective has its own basis of comparison. For one objective you may compare the alternatives using precise numbers or percentages—34 percent, 38 percent, 53 percent. For another, you may need to make broad relational judgments—high, low, medium. For another, you may use purely descriptive terms— yellow, orange, blue. You’re not just trading off apples and oranges; you’re trading off apples and oranges and elephants.

  How do you make tradeoffs among such widely disparate things? That’s what we’re going to show you in this chapter.

  Find and Eliminate Dominated Alternatives

  The first step is to see if you can rule out some of your remaining alternatives before having to make tough tradeoffs. The fewer the alternatives, the fewer the tradeoffs you’ll need to make and the easier your decision will be. To identify alternatives that can be eliminated, follow this simple rule: if alternative A is better than alternative B on some objectives and no worse than B on all other objectives, B can be eliminated from consideration. In such cases, B is said to be dominated by A—it has disadvantages without any advantages.

  Say you need a break and want to take a relaxing weekend getaway. You have five places in mind, and you have three objectives: low cost, good weather, and short travel time. In looking at your options, you notice that alternative C costs more, has worse weather, and requires the same travel time as alternative D. Alternative C is dominated and can therefore be eliminated.

  You need not be rigid in thinking about dominance. In making further comparisons among your options, you may find, for example, that alternative E also has higher costs and worse weather than alternative D but has a slight advantage in travel time—it would take a half hour less to get to E. You may easily conclude that the relatively small time advantage doesn’t outweigh the weather and cost disadvantages. For practical purposes, alternative E is dominated by D—we call this ‘‘practical dominance’’—so you can eliminate alternative E as well. By looking for dominance, you’ve just made your decision much simpler—you have to choose among only three alternatives, not five.

  Consequences tables, which we discussed in the last chapter, can be great aids in identifying dominated alternatives because they provide a framework that facilitates comparisons. But if there are many alternatives and objectives, there can be so much information in the table that it becomes hard to spot dominance. Glance back at Vincent Sahid’s consequences table on page 71, and you’ll see what we mean. To make it easier to uncover dominance, you should create a second table in which the descriptions of consequences are replaced with simple rankings.

  Working row by row—that is, objective by objective—you determine the consequence that best fulfills the objective and replace it with the number 1; you then find the second best consequence and replace it with the number 2; and you continue in this way until you’ve ranked the consequences of all the alternatives. When Vincent looks at the ‘‘Vacation’’ objective in his table, for example, he sees that 15 days ranks first, 14 days ranks second, the two 12 days tie for third, and 10 days ranks fifth. When he moves from the quantitatively measured objectives to the qualitatively measured ones, he finds that more thought is required, as the rankings need to be based on subjective judgments rather than objective comparisons. In assessing the benefits packages, for example, he decides that dental coverage is more important to him than a retirement plan, and he makes his rankings on that basis. Vincent’s ranking table is shown below.

  Dominance is much easier to see when you’re looking at simple rankings. Vincent sees that job E is clearly dominated by job B—it’s worse on four objectives and equivalent on two. Comparing job A and job D, he sees that job A is better on three objectives and worse on one (vacation), with two ties. When an alternative has only one advantage compared to another, as with job D, it is a candidate for elimination due to practical dominance. In this case, Vincent easily concludes that the one-day vacation advantage of job D is far outweighed by its disadvantages in salary, business skills development, and benefits. Hence, job D is practically dominated by Job A and can also be eliminated.

  Ranking Alternatives on Each Objective for Vincent Sahid’s Job Decision

  * * *

  Using a ranking table to eliminate dominated alternatives can save you a lot of effort. Sometimes, in fact, it can lead directly to the final decision—if all your alternatives but one are dominated, then the remaining alternative is your best choice. The process of determining dominance also protects you from mistakenly selecting inferior alternatives, because they are removed from contention.

  Make Tradeoffs Using Even Swaps

  If you still have more than one alternative in contention, you’ll need to make tradeoffs. At this point, it will be useful to take a short trip back in time to see what the American sage Ben Franklin had to say about decision tradeoffs. More than 200 years ago, Franklin’s friend Joseph Priestley, a noted scientist, faced a tough decision, and he wrote to Franklin to ask which of two alternatives he should choose. Franklin recognized that the choice would depend on Priestley’s objectives and on his evaluation of the two alternatives with respect to those objectives. Rather than suggest a specific choice, therefore, Franklin outlined a reasonable process to help Priestley choose. Here is Franklin’s letter, sent from London on September 19, 1772.

  Dear Sir,

  In the affair of so much importance to you, wherein you ask my advice, I cannot, for want of sufficient premises advise you what to determine, but if you please I will tell you how.

  When those difficult cases occur, they are difficult, chiefly because while we have them under consideration, all the reasons pro and con are not present to the mind at the same time; but sometimes some set present themselves, and at other times another, the first being out of sight. Hence the various purposes or inclinations that alternately prevail, and the uncertainty that perplexes us.

  To get over this, my way is to divide half a sheet of paper by a line into two columns; writing over the one pro, and over the other con. Then during three or four days consideration, I put down under the different heads short hints of the different motives, that at different times occur to me, for or against the measure.

  When I have thus got them all together in one view, I endeavor to estimate their respective weights; and where I find two, one on each side, that seem equal, I strike them both out. If I find a reason pro equal to two reasons con, I strike out the three. If I judge some two reasons con, equal to some three reasons pro, I strike out the five; and thus proceeding I find at length where the balance lies; and if, after a day or two of further consideration, nothing new that is of importance occurs on either side, I come to a determination accordingly.

  And, though the weight of reasons cannot be taken with the precision of algebraic quantities, yet when each is thus considered, separately and comparatively, and the whole lies before me, I think I can judge better, and am less liable to make a rash step, and in fact I have found great advantage from this kind of equation, in what may be called moral or prudential algebra.

  Wishing sincerely that you may determine for the best, I am ever, my dear friend, yours most affectionately.

  B. Franklin

  Ben Franklin proposed a wonderful way to simplify a complex problem. Each time he eliminated an item from his list of pros and cons, he replaced his original problem with an equivalent but simpler one. Ultimately, by honing his list, he revealed a clear choice. Although Franklin did not explicitly use a list of objectives, his caution in advising his friend ‘‘for want of sufficient premises,’’ together with his focused approach to his lists of pros and cons, shows that he relied on them implicitly.

  A consequences table can be use
d to extend Franklin’s ideas about a ‘‘moral or prudential algebra’’ to a choice among any number of alternatives, not just two. In the following pages, we’ll show how to make tough tradeoffs and use them to replace your complex decision problem with a simpler one, just as Franklin did. We call this technique the even swap method. First we’ll describe how the even swap method works, illustrating the process using a simple example with only two alternatives and two objectives, and later we’ll apply it to a more complex situation with many objectives and alternatives.

  The Essence of the Even Swap Method

  What is the even swap method? To explain the concept, we need to first state an obvious but fundamental tenet of decision making: if all alternatives are rated equally for a given objective—for example, all cost the same—then you can ignore that objective in choosing among those alternatives. If all airlines charge the same fare for the New York–San Francisco flight, then cost doesn’t matter. Your decision will hinge only on the remaining objectives.

  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 this objective becomes irrelevant. 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. If, for example, American Airlines charged $100 more for a New York–San Francisco flight than did Continental, you might swap a $100 reduction in the American fare for 2,000 fewer American frequent flyer miles. In other words, you’d ‘‘pay’’ 2,000 frequent flyer miles for the fare cut. Now, American would score the same as Continental on the cost objective, so cost would have no bearing in deciding between them. Whereas the assessment of dominance enables you to eliminate alternatives, the even swap method allows you to eliminate objectives. As more objectives are eliminated, additional alternatives can be eliminated because of dominance, and the decision becomes easier.

  Application of the Even Swap Method

  Let’s apply the even swap method to a fairly simple problem to illustrate how it works. Imagine you’re running a Brazilian cola company, and a number of other companies have expressed interest in buying franchises to bottle and sell your product. Your company currently has a 20 percent share of its market, and it earned $20 million in the fiscal year that’s just ended. You have two key objectives for the coming year: increase profits and expand market share. You estimate that franchising would reduce your profits to $10 million due to startup costs, but it would increase your share to 26 percent. If you don’t franchise, your profits would rise to $25 million, but your share would increase to only 21 percent. You put all of this down in a consequences table (see below).

  Which is the smart choice? As the table indicates, the decision boils down to whether the additional $15 million profit from not franchising is worth more or less than the additional 5 percent market share from franchising. To resolve this question, you can apply the even swap method following a straightforward process.

  First, determine the change necessary to cancel out an objective. If you could cancel out the $15 million profit advantage of not franchising, the decision would depend only on market share.

  Second, assess what change in another objective would compensate for the needed change. You must determine what increase in market share would compensate for the profit decrease of $15 million. After a careful analysis of the long-term benefits of increased share, you settle on a 3 percent increase.

  Consequences Table for Cola Company’s Possible Marketing Strategies

  * * *

  Alternatives

  Objectives

  Franchising

  Not Franchising

  Profit (in millions) $10 $25

  Market share

  26%

  21%

  Third, make the even swap. In the consequences table, you reduce the profit of not franchising by $15 million, while increasing its market share by 3 percent, to 24 percent. The table below shows the restated consequences (a $10 million profit and a 24 percent market share) that are equivalent in value to the original consequences (a $25 million profit and a 21 percent market share).

  Fourth, cancel out the now-irrelevant objective. Now that the profits for the two alternatives are equivalent, profit can be eliminated as a consideration in the decision. It all boils down to market share.

  Finally, eliminate the dominated alternative. The new decision, while equivalent to the original one, is now easy. The franchising alternative, better on market share, is the obvious choice.

  For the cola company, only one even swap revealed the superior alternative. Usually it takes more—often many more. The beauty of the even swap approach is that, no matter how many alternatives and objectives you’re weighing, you can methodically reduce the number of objectives you need to consider until a clear choice emerges. The method, in other words, is iterative. You keep switching between making even swaps (to eliminate objectives) and identifying dominance (to eliminate alternatives) until only one alternative remains.

  Cola Company’s Even Swap

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  Simplify a Complex Decision with Even Swaps

  Now that we’ve discussed each step of the process, let’s apply the whole thing to a more complex problem. Alan Miller is a computer scientist who started a technical consulting practice three years ago. For the first year he worked out of his home, but with his business growing he decided to sign a two-year lease on some space in the Pierpoint Office Park. Now that lease is about to expire. He needs to decide whether to renew it or move to a new location.

  After considerable thought about his business and its prospects, Alan defines five fundamental objectives for an office: short commuting time, good access to clients, good office services (clerical assistance, copy machines, faxes, mail service), sufficient space, and low cost. He surveys more than a dozen possible locations and, dismissing those that clearly fall short of his needs, settles on five viable alternatives: Parkway, Lombard, Baranov, Montana, and his current building, Pierpoint.

  He then develops a consequences table (page 95), laying out the consequences of each alternative for each objective and using a different measurement scale for each objective. He describes commuting time as the average time in minutes needed to travel to work during rush hour. To measure access to clients, he determines the percentage of his clients whose business is within an hour’s lunchtime drive of the office. He uses a simple three-point scale to describe the office services provided: A means full service, including copy and fax machines, telephone answering, and for-fee secretarial assistance; B indicates fax machines and telephone answering only; and C means that no services are available. Office size is measured in square feet, and cost is measured by monthly rent.

  Consequences Table for Alan’s Office Selection

  * * *

  To simplify his decision, Alan immediately seeks to eliminate some alternatives by using dominance or practical dominance. To make this easier, he uses the descriptions in the consequences table to create a ranking table (page 96).

  Scanning the columns, he quickly sees that the Lombard office dominates the current Pierpoint site, outranking it on four objectives and tying it on the fifth (office size). He eliminates Pierpoint from further consideration. He also sees that Montana almost dominates Parkway, falling behind in cost only. Can he eliminate Parkway, too? He flips back to his original consequences table and notices that, for the small cost disadvantage of Montana—only $50 per month—he would gain an additional 150 square feet, a much shorter commute, and much better client access. He eliminates Parkway using practical dominance.

  Ranking Alternatives on Each Objective for Alan’s Office Selection

  * * *

  Alan has reduced his choice to three alternatives—Lombard, Baranov, and Montana—none of which domin
ates any other. He redraws his consequences table (see ‘‘Redrawn Table,’’ page 97).

  To further clarify his choice, Alan needs to make a series of even swaps. In scanning the table, he sees the similarity among the commuting times for the three remaining alternatives. If the Baranov’s 20-minute commute were increased to 25 minutes using an even swap, all three alternatives would have an equivalent commute time, and that objective could then be dropped from further consideration. Alan decides that this 5-minute increase in Baranov’s commute time can be compensated for by an 8 percent increase in Baranov’s client access, from 70 to 78 percent. He makes the swap, rendering commute time irrelevant in his deliberations (see ‘‘Eliminate Commute’’ table above). Alan then checks this table for dominated alternatives but finds none.

  Making a Series of Even Swaps to Select the Right Office

  * * *

  Alan next eliminates the office services objective by making two even swaps with monthly cost. Using the Lombard service level (B) as a standard, he swaps an increase in service level from C to B for Baranov for a $250 increase in monthly costs. He also swaps a decrease in service level from A to B for Montana for a savings of $100 per month (see ‘‘Eliminate Office Services and Baranov’’ table above).