All decisions affect the future, of course. Karen’s decision, at the end of the last chapter, to take the settlement offer in her lawsuit will obviously affect her future options and opportunities. But those will be essentially new decision situations. The kinds of decisions we want to talk about here involve a necessary connection between the current decision and one or more later ones. A doctor initiating treatment on a critically ill patient, for example, has to think about how to respond to possible complications and how the current treatment may open or foreclose alternative treatments in the future.
In such linked decisions, the alternative selected today creates the alternatives available tomorrow and affects the relative desirability of those future alternatives. Linked decisions can be years apart, as with the choice of a college major and the subsequent choice of a career. Or they can be minutes apart, as with a series of choices about which route to take when driving to work during rush hour. In all cases, though, they add a new layer of complexity to decision making.
Linked Decisions Are Complex
Here’s a business example. Imagine that you’re the marketing director for a juice company, and you’re in charge of the launch of a promising new fresh-fruit drink made with added vitamins. You know that the success of the drink will hinge on its marketing concept—the combination of name, price, packaging, advertising, and so forth that will define the product in the marketplace. By creating an image of the drink in consumers’ minds, the concept will have tremendous influence over who buys the drink and in what quantity.
Your original concept for the beverage was as a thirst quencher for young adults. Market research indicated that the concept was a viable one—it had a good chance of succeeding with the targeted consumers. But the research also revealed signs that a different concept, not yet fully developed, could be even more successful. This concept would require a slight reformulation of the product and a market approach targeting it as an energy drink for active adults 25 to 55 years of age.
Which concept—thirst quencher or energy drink—should you choose? Each presents uncertainties concerning sales. As an energy drink, the product could far outsell the thirst quencher, but if it flopped, the failure would likely be greater as well.
In evaluating the desirability of each concept, you need to think about possible future decisions. If, for example, the product’s initial sales are disappointing, how might you turn them around? A different advertising campaign? More money for price promotions at retail outlets? If the thirst quencher has low sales, you might be able to reformulate it as an energy drink and market it to the older age group. A failed energy drink, however, would be unlikely to appeal to young adults as a thirst quencher, no matter how it was reformulated or repackaged. Your choice of concept is thus linked to these future decisions.
Before actually choosing a concept, you could, of course, decide to conduct market research on the energy drink. The research would reduce the uncertainty about potential sales, providing more information for making a smarter choice on the concept. But it would cost a lot of money and delay introduction of the new drink, giving competitors more time to come up with competing products. Would it be worth it?
The situation you face contains all the elements of linked decisions:
•A basic decision must be addressed now (which concept).
•The desirability of each alternative in the basic decision is influenced by uncertainties (how well each would sell).
•Relative desirability is also influenced by a future decision (how to possibly turn an unsuccessful product introduction into a successful product) that would be made after the uncertainty in the basic decision is resolved (data received on initial sales of the drink).
•An opportunity exists to obtain information (market research on the energy drink concept) before making the basic decision. This information could reduce the uncertainty in the basic decision and, one would hope, improve the future decisions—but at a cost (in money and time).
•The typical decision-making pattern is a string of decide, then learn; decide, then learn more; decide, then learn; and so on.
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:
•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.
Relationships among Linked Decisions
* * *
•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 (see figure on page 167), you are able to clarify the sequence of decisions and see how each one will influence the others.
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. After making a basic decision (your move as a chess player) and noting developments (your opponent’s move, which resolves the pending uncertainty), the decision maker again plans a few decisions ahead before making the next choice. Continuing to do this, step by step, moves the series of decisions toward the fulfillment of the decision maker’s objectives.
Follow Six Steps to Analyze Linked Decisions
Linked decisions can present hundreds or even thousands of possible combinations of alternatives and outcomes—far too many to keep in mind all at once. The trick to making such decisions, therefore, is to size up the situation and then focus your attention on those aspects that matter most. By creating a simplified version of your decision that retains its essential features, you can think sensibly and effectively about it. The following six-step process will help guide you.
Step 1: 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. For instance, in the marketing example, how well the juice will sell is the dominant uncertainty. In comparison, uncertainties about production costs are minor, so a reasonable assumption about costs will do.
Step 2: 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. A politician, for instance, believing his chances of winning a city council election to be excellent, tentatively plans to run. But if new information reveals his support to be weaker than he believed, he may need to reconsider his 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. The politician, for example, could reduce his uncertainty about his support if he had clear data about his name recognition and his standing among voters. If fewer than half of the voters recognized his name
and, of those, fewer than half viewed him favorably, he might conclude that his chances of winning were poor and reverse his tentative decision to run.
•Think about ways to obtain the important information. To collect information on voter attitudes, the politician could conduct a telephone poll or a series of focus groups.
Having decided what information to consider getting and how to get it, the next issue concerning information is whether it is worth getting it before making your basic decision. That comes in step 5.
Step 3: Identify future decisions linked to the basic decision. To identify relevant future decisions, you need to ask what decisions would naturally follow from each alternative in your basic decision. If the politician decides not to run, for example, he will need to consider his next moves. Should he throw his support behind another candidate? Should he work to bolster his name recognition by seeking an appointed office? Should he start working and raising money toward the next election? 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 ahead 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.
Step 4: 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:
•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 that on page 167 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.
•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. Keep the tree simple so it’s easier to understand. Later you can add further details, such as additional possible outcomes of uncertainties or additional alternatives, as the case requires.
•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 in Chapters 5 and 7 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.
Step 5: Decide what to do in the basic decision. To ‘‘solve’’ your basic decision problem, you want to think ahead and then work backward in 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 make 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 made a plan for each alternative so you will be able to evaluate it more clearly.
If, in the course of planning, you find it tough to decide what to do at some future decision point, you may need to quantify your tradeoffs, uncertainties, or risk tolerance using the techniques described in Chapters 6 through 8. But remember: quantify only as necessary. Quantify one element at a time and check after each to see if a decision has become obvious.
Deciding what to do in your basic decision includes deciding what information, if any, to collect before making the basic decision. To do this, first recall the lists you composed in step 2. Then, for each item on the lists, estimate the costs and benefits of gathering the information. Costs typically include money, effort, time, discomfort, and delay. To understand what benefit you might derive from additional information, you must know what you would choose if you didn’t gather the information; new information is of benefit only if it might change a decision. If you’d make the same basic decision regardless of the information learned, then the information isn’t worth gathering. A good quick test to weed out information-gathering alternatives is to ask what you’d pay to completely resolve the uncertainty. If an information alternative costs more, it’s an obvious noncontender.
Step 6: Treat later decisions as new decision problems. The clock moves ahead. Having chosen an alternative for your basic decision (the thirst quencher) and having learned something (it’s not selling well), what should you do? 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 new basic decision.
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. Emergency room doctors, firefighters, newsroom editors, and business managers are among those who often find themselves in such fast-developing situations. In these cases, you should consider developing flexible plans that allow you to make the most of whatever circumstances arise. Flexible plans keep your options open. They can take a number of forms:
•All-weather plans. Like all-weather tires, all-weather plans work well in most situations, but they are seldom the optimal choice for any one situation. 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. Business managers do this when they develop a one-year plan but update it quarterly, taking into account business developments in the interim.
•Option wideners. Sometimes the best plan is to act in a way that expands your set of future alternatives. If a computer manufacturer had only one chip supplier, for example, it might consider widening its supplier list, purchasing, say, 90 percent of its chips from its regular source and 5 percent from each of two new sources. Then, if the established supply line were interrupted, alternatives could be developed sooner. It might cost the manufacturer a little more to buy from three vendors, but in the long run it could save the company’s business.
•‘‘Be prepared’’ plans. These backup plans stress preparedness—having a reasonable response available for most contingencies. Many people, for example, keep a first aid kit and basic medications in the medicine cabinet for emergencies and a bottle of wine or a pitcher of iced tea in the refrigerator in case friends drop by. As the old expression has it, ‘‘Success is what happens when preparation meets opportunity.’’
APPLICATION
Should Dan Change Jobs?
Dan Morgan must make up his mind quickly. His current job is deteriorating, but an intriguing new job offer presents complications.
Dan, age 52, and his wife Doris, age 45, have two children: Sarah, 16, a high school sophomore, and Nick, 13, an eighth-grader, both in public school. They live in a comfortable house in the Boston suburb of Arlington. Doris, an elementary school teacher, works in a nearby town. She feels burnt out by the disciplinary demands of her job and, at an annual salary of $42,000, underpaid.
Dan, a computer specialist—not an engineer or computer scientist, and that’s a problem—sells software for Omega Software. Once a high-flier, Omega is now mired in
hard times. It has laid off a number of salespeople over the last three years, and Dan thinks it’s only a matter of time before they get around to firing him or trying to entice him into early retirement.
Dan makes an annual salary of $50,000 plus commissions and bonuses, which have run as high as $40,000 in past years but have tumbled lately to $15,000. Still, with Doris’s salary, the Morgans feel financially comfortable. But what if Dan lost his job? A comparable one would not be easy to find at his age.
Enter a new possibility. Dan has often worked with Bill Brown, part owner of an up-and-coming computer networking company, DotCom Communications, in Amherst, Massachusetts—about 100 miles away. Brown has offered Dan a job in software and systems sales at an annual salary of $60,000, plus commissions that would range from $10,000 to $40,000 per year. DotCom is growing, and Dan feels that, should he take the job, his future would be relatively secure. DotCom needs to hire someone fast, so Dan has only a week—at most, three—to decide whether to take the job.
Dan and Doris work together to make all serious decisions affecting the family—and this one certainly qualifies as serious. They sit down and get to work.
Objectives
Dan and Doris compile a list of objectives, considering everything they can think of that contributes to the happiness of the family:
•Quality of work for Dan
•Quality of work for Doris
•Dan’s pay
•Doris’s pay
•Dan’s job security
•Quality of housing for the family
•Culture and amenities, mostly for Dan and Doris
•Quality of education for Sarah
•Quality of education for Nick
•Social life and recreational activities for Sarah
Smart Choices Page 14
