individual-entry-BA-Blog

« Another Guest Author - Dr Rahul Asthana | Main | Cross-platform approaches are the future »

EDM: A platform for strategic decisions

EDM is often thought of as the platform for the better decisioning of the millions of operational decisions typical within an enterprise. These are the relatively “little” decisions – such as providing a call center response to an individual customer - that individually don’t have a large impact on the organization, but collectively do. Reading an excellent article by John S. Hammond, Ralph Keeney and Howard Raiffa titled “The Hidden Traps in Decision Making,” in the January 2006 edition of the Harvard Business Review, I was struck by how EDM can be a platform for the better decisioning not just of the millions of small impact decisions, but also for the better decisioning of the very high impact strategic decisions made by senior executives at companies.

As Hammond, Keeney and Raiffa point out in their article, high level strategic decision making can often be sabotaged not just by the usual suspects such as a lack of information, defined alternatives, or complete cost-benefit analysis, but by the very way the human brain works! It appears that there are psychological traps due to biases, sensory misperceptions or emotions that create flaws in any human’s decision making process. Most dangerous of all is that these psychological traps are often hardwired into the human thinking process and so become completely invisible. Unless, that is, a structured approach is taken to become aware of these potential traps and adopt mechanisms to overcome their effects. This is where, I believe, EDM can play a key role.

The hidden traps in decision making are defined by the authors as falling into one of six categories: The anchoring trap, the status quo trap, the sunk cost trap, the confirming evidence trap, the framing trap, and the estimation or forecasting traps. Each of these is quite fascinating in its own right; but to show how EDM can play a central role is in helping executives avoid or minimize these traps, I’ll use just a couple of these – the “anchoring” trap and the “status quo” trap -- to explain what I mean:

The “anchoring” trap explains how humans “anchor” their decisions on a piece of information given to them just before they have to make a decision. The great example the authors give is in negotiations between a seller and a buyer. Typically, the opening offer given by a seller, especially if it is defensible, tends to “anchor” the value the buyer sees in a product around the terms given by the seller. This makes it much more likely that the buyer will not seek to understand the intrinsic value of the product but instead will look at the product in terms the seller wants. The result is that buyers who fall into this trap don’t bring a fresh perspective to the process, but simply negotiate around the edges of what the seller offers.

The “status quo” trap describes the strong bias that decision makers, especially senior decision makers, have towards protecting their careers by perpetuating the status quo and avoiding, in effect, “rocking the boat.” There is nothing wrong, necessarily, as the authors point out, in wanting to maintain the status quo – it may indeed be the best decision. However, the problem arises when the status quo is chosen for reasons other than being the best decision.

So what is a decision maker to do to avoid these traps? To avoid the “anchoring” trap the authors suggest several prescriptions, including viewing the problem from different perspectives, taking a “clean sheet of paper” approach to the problem before becoming anchored to the seller’s ideas, consulting and listening to a range of different perspectives, and, really, just being aware of the anchoring trap. To avoid the “status quo trap,” the authors suggest that decision makers always test to see how the business objectives would be met by the status quo, never assume that the status quo is the only alternative, avoid over emphasizing the cost of switching away from the status quo, think about not just the present, but also the future effect of alternatives, and, again, be aware that this trap can exist.

So how does EDM help? If a decision was taken through the EDM framework, a rules based system would prompt decision makers to first determine if they were falling into one or more of the six psychological traps the authors have defined. If they are, and once the specific traps were determined, the EDM framework would then take the decision makers on a path through the prescriptive solutions that the authors have defined. The EDM solution would, in effect, force the decision makers through the key step of confronting the possibility of hidden psychological traps in their decision making, and then would guide them to ensure that their decisions were free of the potential flaws that these traps can cause.

Imagine the effect on strategic decision making.

First time on the EDM blog?
Subscribe to the EDM blog feed or check out some other recent posts:

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d83451629b69e200d83465523b69e2

Listed below are links to weblogs that reference EDM: A platform for strategic decisions:

» Don't BS with BI from James Taylor's Decision Management
Mark Smith over on Intelligent Enterprise had a pithy post about the need to have a strategy when applying BI. Now I am fairly cynical about BI - perhaps even more than Mark - so much so that I am... [Read More]

Comments

The comments to this entry are closed.

Search Site


  • dmblog.fico.com

Subscribe

  • enter your email

Upcoming Events

  • FICO Tools & Analytics User Forum 2012
    BERLIN: September 11-12, 2012 LONDON: September 18-19, 2012 Gain new insights for improving business performance through advanced analytics and decision management tools.