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Business Risk and Simulation Modelling in Practice. Rees Michael
Читать онлайн.Название Business Risk and Simulation Modelling in Practice
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isbn 9781118904046
Автор произведения Rees Michael
Жанр Зарубежная образовательная литература
Издательство Автор
Intuitive approaches are typically characterised, driven or dominated by:
• Gut feel, experience and biases.
• Rapid decision-making with a bias to reinforce initial conclusions and reject counter-narratives.
• Ignoring or discounting items that are complex or not understood well.
• Little (formalised) thinking about risks, uncertainties and unknowns.
• Little (formalised) decision processes or governance procedures.
• Lack of transparency into decision criteria and the importance placed on various items.
• Seeking input from only a small set of people, rather than from a diverse group.
At its best, intuitive decision-making can be powerful and effective, e.g. low investment nevertheless resulting in a good decision (generally). Indeed, justification for such approaches can be made using the framework of “pattern recognition”; that is, the decision-maker (typically subconsciously) views the particular situation being faced as being similar (or identical for decision purposes) to other situations that have been experienced many times before. Thus, such approaches are most appropriate where a particular type of situation is faced frequently, or where the consequences of a poor decision are not significant (or can be reversed), or in emergency situations where a very rapid decision is required. Examples include:
• Planning at what time to leave to travel to work in the morning, which may be based on many years of (non-documented) experience of using the same route.
• An experienced driver who is not overtly conscious of conditions on a road that he drives frequently, but is nevertheless making constant implicit decisions.
Of course, intuitive-driven approaches can have their more extreme forms: an article in The New York Times of 20 October 2013 (“When C.E.O.'s Embrace the Occult”) reports the widespread use of fortune tellers by South Korean executives facing important decisions.
Rational approaches can be contrasted with intuitive ones, and are characterised by:
• Non-reliance on personal biases.
• Strong reliance on analysis, models and frameworks.
• Objective, holistic and considered thinking.
• Self-critical: ongoing attempts to look for flaws and possible improvements in the process and the analysis.
• Openness to independent review and discussion.
• Formalised processes and decision governance.
• Setting objectives and creating higher levels of transparency into explicit decision criteria.
• A desire to consider all factors that may be relevant, to incorporate alternative viewpoints, the needs of different stakeholders, and to achieve diverse input from various sources.
• Explicitly searching out more information, a wide variety of diverse inputs and the collection of data or expert judgement.
• Openness to use alternative tools and techniques where they may be appropriate.
• Willingness to invest more in time, processes, tools and communication.
• Exposing, challenging, overcoming or minimising biases that are often present in situations where insufficient reflection or analysis has taken place.
• (Usually) with some quantification and prioritisation.
• (Ideally) with an appropriate consideration of factors that may lead to goals being compromised (risks and uncertainties).
Many decisions are made based on a combination of intuition and rational considerations; clearly formalised risk assessment is concerned in principle with increasing the rational input into such processes.
Intuitive approaches may be less reliable for decisions concerned with major investment or with very long-term implications; it would seem logical that no management team could genuinely have already had very significant experience with large numbers of very similar or identical projects over their full life cycle.
On the other hand, it is probably fair to say that intuition is generally the dominant force in terms of how decisions are made in practice:
• A course of action that “feels” wrong to a decision-maker (but is apparently supported by rational analysis) is unlikely to be accepted. Similarly, a course of action that “feels right” to a decision-maker will rarely be rejected, even if the analysis would recommend doing so; rather, in each case, invariably one would search for factors that have been incorrectly assessed (or omitted) from the rational approach. These may include important decision criteria that were overlooked, or other items that a team conducting the analysis was not aware of, but which were relevant from a decision-maker's perspective.
• In most business situations, there will almost always be some characteristics that are common from one project to another (otherwise the company may be straying from its core competence), and hence intuitive processes have some role. As a result, even where the use of rational approaches would seem appropriate (e.g. major investments, expansion or restructuring projects), such approaches may not receive the priority and attention that they deserve.
• The rational approaches are more complex to implement, requiring higher levels of discipline, extra time and potentially other investments; intuitive processes require less effort, and match many people's inherent personal preference for verbal communication and rapid action. In this context, some well-known quotes come to mind: “Opinion is the medium between knowledge and ignorance” (Plato), and “Too often we enjoy the comfort of opinion without the discomfort of thought” (John F. Kennedy).
• However much rational analysis has been conducted, management judgement (or intuition) will typically still need to play an important role in many decisions: very few situations can be understood perfectly, with all factors or risks identified and correctly captured. For example, some qualitative factors may not have been represented in the common terms required for a quantitative model (i.e. typically in financial terms). In addition, and as a minimum, there will always be some “unknown unknowns” that decision-makers need to be mindful of.
Thus, ideally a robust and objective rational analysis would help to develop and inform a decision-maker's intuition (especially in the earlier stages of a decision process), and also to support and reinforce it (in later stages). Where there is a mismatch between the intuition of a particular decision-maker and the results of a rational analysis, in the first instance, one may look for areas where the rational analysis is incomplete or based on incorrect assumptions: there could be factors that are important to a decision-maker that an analytic-driven team is not aware of; ideally these would be incorporated as far as possible in revised and more robust rational analysis. On the other hand, there may be cases where even once such factors are included, the rational and intuitive approaches diverge in their recommendations. This may lead one to be able to show that the original intuition was incorrect and also to the drivers of this; of course, generally in such cases, there may be extra rounds of communication that are required with a decision-maker to explain the relevant issues. In other words, genuinely rational and objective analysis should be aligned with intuition, and may serve to modify understanding and generate further intuition in parallel.
The importance of intuitive decision-making, coupled with the presence of potential biases, will create yet more challenges to the implementation of rational and disciplined approaches to risk assessment. Biases may be thought of as those that are:
• Motivational or political. These are where one has some incentive to deliberately bias a process, a set of results or assumptions used.
• Cognitive. These are biases that are inherent to the human psyche, and often believed to have arisen for evolutionary reasons.
• Structural. These are situations where a particular type of approach inherently creates biases