Management Decision Making

INTRODUCTION Much of what managers and supervisors do is solve problems and make decisions. New managers and supervisors, in particular, often make solve problems and decisions by reacting to them. They are "under the gun", stressed and very short for time. Consequently, when they encounter a new problem or decision they must make, they react with a decision that seemed to work before. It's easy with this approach to get stuck in a circle of solving the same problem over and over again. Therefore, as a new manager or supervisor, get used to an organized approach to problem solving and decision making. Not all problems can be solved and decisions made by the following, rather rational approach. However, the following basic guidelines will get you started.

I-

What is decision making? 1)

Some Definitions

2)

Kinds of Decisions a- Decisions whether b- Decisions which c- Contingent decisions

3)

The Decision Environment

4)

Approaches to Decision Making a- Authoritarian b- Group

5)

Some Decision Making Strategies a- Optimizing b- Satisficing c- Maximax d- Maximin

II-

Decision Making Procedure and techniques

1) Basic

guidelines

to

decision

making

solving 2) Decision making techniques a- Pareto Analysis b- Paired Comparison Analysis c- Grid Analysis d- PMI e- Force Field Analysis f- Six Thinking Hats g- Starbursting h- Stepladder Technique i- Cost/Benefit Analysis j- Decision Trees

III-

Risking 1)

General Comments on Risk Taking

2)

The Orthodox Theory of Risk Evaluation

3)

Advice on Risking

4)

Risk Management Strategies

and

problem

I-

What is decision making? 1)Some Definitions

A good place to start is with some standard definitions of decision making. Decision making is the study of identifying and choosing alternatives based on the values and preferences of the decision maker. Making a decision implies that there are alternative choices to be considered, and 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 or effectiveness and (2) best fits with our goals, desires, lifestyle, values, and so on. Decision making is the process of sufficiently reducing uncertainty and doubt about alternatives to allow a reasonable choice to be made from among them. This definition stresses the information-gathering function of decision making. It should be noted here that uncertainty is reduced rather than eliminated. Very few decisions are made with absolute certainty because complete knowledge about all the alternatives is seldom possible. Thus, every decision involves a certain amount of risk.

2)Kinds of Decisions There are several basic kinds of decisions. a-

Decisions whether

This is the yes/no, either/or decision that must be made before we proceed with the selection of an alternative. Should I buy a new TV? Should I travel this summer?

b- 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 alternative measures up to a set of predefined criteria.

c- 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 into my schedule. OR even, We'll take the route through the valley if we can control the ridge and if we detect no enemy activity to the north. Most people carry around a set of already made, contingent decisions, just waiting for the right conditions or opportunity to arise. Time, energy, price, availability, opportunity, encouragement--all these factors can figure into the necessary conditions that need to be met before we can act on our decision.

3)The Decision Environment Every decision is made within a decision environment, which is defined as the collection of information, alternatives, values, and preferences available at the time of the decision. An ideal decision environment would include all possible information, all of it accurate, and every possible alternative. However, both information and alternatives are constrained because the time and effort to gain information or identify alternatives are limited. The time constraint simply means 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 three 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 goal of decision analysis is to reduce uncertainty. We can almost never have all information 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 suggests two things. First, it explains why hindsight is so much more accurate and better at making decisions that foresight. As time passes, the decision environment continues to grow and expand. New information and new alternatives appear--even after the decision must be made. Armed with new information after the fact, the hindsighters can many times look back and make a much better decision than the original maker, because the decision environment has continued to expand. The second thing suggested by the decision-within-an-environment idea follows from the above point. Since the decision environment continues to expand as time passes, it is often advisable to put off making a decision until close to the deadline. 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 decision too soon. Now, since we are dealing with real life, it is obvious that some alternatives might no longer be available if too much time passes; that is a tension we have to work with, a tension that helps to shape the cutoff date for the decision.

Delaying a decision as long as reasonably possible, then, provides three benefits: 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 released. 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.

4)Approaches to Decision Making There are two major approaches to decision making in an organization, the authoritarian method in which an executive figure makes a decision for the group and the group method in which the group decides what to do.

a- Authoritarian The manager makes the decision based on the knowledge he can gather. 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 something like this: Make decision, 5 min.; explain decision, 30 min.; gain acceptance, 30 min.

b- Group The group shares ideas and analyses, and agrees upon a decision to implement. Studies show that the group often has values, feelings, and reactions quite 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. More than this, it has been shown many times that people prefer to implement the ideas they themselves think of. They will work harder and more energetically to implement 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 work harder on a solution supported by our own vision and our own ego than we will on a solution we have little creative involvement with. There are two types of group decision making sessions. 1. 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? 2. Developmental discussion or structured discussion. Here the problem is broken down into steps, smaller parts with specific goals.

For example, instead of asking generally whether Joe should take the 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 that these questions seek specific information rather than more general impressionistic opinions.

5)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 quality 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 following:

a- Optimizing This is the strategy of choosing the best possible solution to the problem, discovering as many alternatives as possible and choosing the very best. How thoroughly optimizing can be done is dependent on importance of the problem time available for solving it cost involved with alternative solutions availability of resources, knowledge personal psychology, values Note that the collection of complete information and the consideration of all alternatives is seldom possible for most major decisions, so that limitations must be placed on alternatives.

b- Satisficing In this strategy, the first satisfactory alternative is chosen rather than the best alternative. If you are very hungry, you might choose to stop 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 word satisficing was coined by combining satisfactory and sufficient. For many small decisions, such as where to park, what to drink, which pen to use, which tie to wear, and so on, the satisficing strategy is perfect.

c- Maximax This stands for "maximize the maximums." This strategy focuses on evaluating and then choosing the alternatives based on their maximum possible payoff. This is sometimes described as the strategy of the optimist, because favorable 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.

d- Maximin This stands for "maximize the minimums." In this strategy, that of the pessimist, the worst possible outcome of each decision is considered and the decision with the highest minimum is chosen. The Maximin orientation is good when the consequences of a failed decision are particularly harmful or undesirable. Maximin concentrates on the salvage value of a decision, or of the guaranteed return of the decision. It's the philosophy behind the saying, "A bird in the hand is worth two in the bush."

II- Decision

Making

Procedure

and

techniques 1)Basic guidelines to decision making and problem solving a- Define the problem This is often where people struggle. They react to what they think the problem is. Instead, seek to understand more about why you think there's a problem. Defining the problem: (with input from yourself and others) Ask yourself and others, the following questions: a. What can you see that causes you to think there's a problem? b. Where is it happening? c. How is it happening? d. When is it happening? e. With whom is it happening? (HINT: Don't jump to "Who is causing the problem?" When we're stressed, blaming is often one of our first reactions. To be an effective manager, you need to address issues more than people.) f. Why is it happening? g. Write down a five-sentence description of the problem in terms of "The following should be happening, but isn't ..." or "The following is happening and should be: ..." As much as possible, be specific in your description, including what is happening, where, how, with whom and why. (It may be helpful at this point to use a variety of research methods. Also see .

Verifying your understanding of the problems: a. It helps a great deal to verify your problem analysis for conferring with a peer or someone else. Prioritize the problems: a. If you discover that you are looking at several related problems, then prioritize which ones you should address first. b. Note the difference between "important" and "urgent" problems. Often, what we consider to be important problems to consider are really just urgent problems. Important problems deserve more attention. For example, if you're continually answering "urgent" phone calls, then you've probably got a more "important" problem and that's to design a system that screens and prioritizes your phone calls. Understand your role in the problem: a. Your role in the problem can greatly influence how you perceive the role of others. For example, if you're very stressed out, it'll probably look like others are, too, or, you may resort too quickly to blaming and reprimanding others. Or, you are feel very guilty about your role in the problem, you may ignore the accountabilities of others.

b- Look at potential causes for the problem a. It's amazing how much you don't know about what you don't know. Therefore, in this phase, it's critical to get input from other people who notice the problem and who are effected by it. b. It's often useful to collect input from other individuals one at a time (at least at first). Otherwise, people tend to be inhibited about offering their impressions of the real causes of problems. c. Write down what your opinions and what you've heard from others. d. Regarding what you think might be performance problems associated with an employee, it's often useful to seek advice from a peer or your supervisor in order to verify your impression of the problem. e.Write down a description of the cause of the problem and in terms of what is happening, where, when, how, with whom and why.

c- Identify alternatives for approaches to resolve the problem a. At this point, it's useful to keep others involved (unless you're facing a personal and/or employee performance problem). Brainstorm for solutions to the problem. Very simply put, brainstorming is collecting as many ideas as possible, then screening them to find the best idea. It's critical when collecting the ideas to not pass any judgment on the ideas -- just write them down as you hear them. (A wonderful set of skills used to identify the underlying cause of issues is Systems Thinking.)

d- Assess the implications All decisions have implications. If it is a decision at work, it has implications for you, your peers, your team and your superiors. Depending on the decision (e.g. a promotion at work) it may even have implications for your family, especially if it involves relocation.

e- Select an approach to resolve the problem When selecting the best approach, consider: a. Which approach is the most likely to solve the problem for the long term? b. Which approach is the most realistic to accomplish for now? Do you have the resources? Are they affordable? Do you have enough time to implement the approach? c. What is the extent of risk associated with each alternative? (The nature of this step, in particular, in the problem solving process is why problem solving and decision making are highly integrated.)

f- Weigh up pros and cons Another way of looking at a decision is to consider the advantages and disadvantages of each of the options open to you. Simply listing the advantages and disadvantages of each option is a powerful way of moving forward on decisions.

g- Plan the implementation of the best alternative (this is your action plan) a. Carefully consider "What will the situation look like when the problem is solved?" b. What steps should be taken to implement the best alternative to solving the problem? What systems or processes should be changed in your organization, for example, a new policy or procedure? Don't resort to solutions where someone is "just going to try harder". c. How will you know if the steps are being followed or not? (these are your indicators of the success of your plan) d. What resources will you need in terms of people, money and facilities? e. How much time will you need to implement the solution? Write a schedule that includes the start and stop times, and when you expect to see certain indicators of success. f. Who will primarily be responsible for ensuring implementation of the plan? g. Write down the answers to the above questions and consider this as your action plan. h. Communicate the plan to those who will involved in implementing it and, at least, to your immediate supervisor. (An important aspect of this step in the problem-solving process is continually observation and feedback.)

h- Monitor implementation of the plan Monitor the indicators of success: a. Are you seeing what you would expect from the indicators? b. Will the plan be done according to schedule? c. If the plan is not being followed as expected, then consider: Was the plan realistic? Are there sufficient resources to accomplish the plan on schedule? Should more priority be placed on various aspects of the plan? Should the plan be changed?

i-Decide and act Once you have gone through the previous 5 steps, commit to a choice or course of action and start to make it happen. To avoid procrastination, give yourself permission to be okay with any failings that might arise. At the end of the day there is no magic formula for decision making. Following some simple steps and acting can however move you into the realm of effective decision maker.

j- Verify if the problem has been resolved or not One of the best ways to verify if a problem has been solved or not is to resume normal operations in the organization. Still, you should consider: a. What changes should be made to avoid this type of problem in the future? Consider changes to policies and procedures, training, etc. b. Lastly, consider "What did you learn from this problem solving?" Consider new knowledge, understanding and/or skills. c. Consider writing a brief memo that highlights the success of the problem solving effort, and what you learned as a result. Share it with your supervisor, peers and subordinates.

2)Decision making techniques a-

Pareto Analysis

Choosing the Most Important Changes to Make Pareto analysis is a very simple technique that helps you to choose the most effective changes to make. It uses the Pareto principle – the idea that by doing 20% of work you can generate 80% of the advantage of doing the entire job*. Pareto analysis is a formal technique for finding the changes that will give the biggest benefits. It is useful where many possible courses of action are competing for your attention. b-

Paired Comparison Analysis

Working Out the Relative Importance of Different Options Paired Comparison Analysis helps you to work out the importance of a number of options relative to each other. It is particularly useful where you do not have objective data to base this on.

This makes it easy to choose the most important problem to solve, or select the solution that will give you the greatest advantage. Paired Comparison Analysis helps you to set priorities where there are conflicting demands on your resources. It is also an ideal tool for comparing "apples with oranges" – completely different options such as whether to invest in marketing, a new IT system or a new piece of machinery. These decisions are usually much harder than comparing three possible new IT systems, for example c-

Grid Analysis

Making a Choice Where Many Factors Must Be Considered Grid Analysis (also known as Decision Matrix Analysis, Pugh Matrix Analysis or MAUT, which stands for Multi-Attribute Utility Theory) is a useful technique to use for making a decision. It is particularly powerful where you have a number of good alternatives to choose from, and many different factors to take into account. This makes it a great technique to use in almost any important decision where there isn't a clear and obvious preferred option. Being able to use Grid Analysis means that you can take decisions confidently and rationally, at a time when other people might be struggling to make a decision. d-

PMI

Weighing the Pros and Cons of a Decision PMI stands for 'Plus/Minus/Interesting'. It is a valuable improvement to the 'weighing pros and cons' technique used for centuries. PMI is an important Decision Making tool: the mind tools used so far in this section have focused on selecting a course of action from a range of options. Before you move straight to action on this course of action, it is important to check that it is going to improve the situation (it may actually be best to do nothing!) PMI is a useful tool for doing this. e-

Force Field Analysis

Understanding the Pressures For and Against Change Force Field Analysis is a useful technique for looking at all the forces for and against a decision. In effect, it is a specialized method of weighing pros and cons. By carrying out the analysis you can plan to strengthen the forces supporting a decision, and reduce the impact of opposition to it. f-

Six Thinking Hats

Looking at a Decision from All Points of View "Six Thinking Hats" is a powerful technique that helps you look at important decisions from a number of different perspectives. It helps you make better decisions by pushing you to move outside your habitual ways of thinking. As such, it helps you understand the full complexity of a decision, and spot issues and opportunities which you might otherwise not notice. Many successful people think from a very rational, positive viewpoint, and this is part of the reason that they are successful. Often, though, they may fail to look at problems from emotional, intuitive, creative or negative viewpoints. This can mean that they underestimate resistance to change, don't make creative leaps, and fail to make essential contingency plans. Similarly, pessimists may be excessively defensive, and people used to a very logical approach to problem solving may fail to engage their creativity or listen to their intuition. If you look at a problem using the Six Thinking Hats technique, then you'll use all of these approaches to develop your best solution. Your decisions and plans will mix ambition, skill in execution, sensitivity, creativity and good contingency planning. This tool was created by Edward de Bono in his book "6 Thinking Hats". g-

Starbursting

Understanding new ideas by brainstorming questions When a colleague suggests a new product or idea, and you're trying to understand it and how it works, a typical response is to bombard the other person with questions. What features would it have? How much would it cost? Where would we market it? Who would be responsible for it? Who would buy it? Why would they buy it? And so on. Asking questions like these is a valuable way of understanding the new idea, and of challenging it to ensure that all of the relevant aspects of it have been considered before any work begins on implementing it. To get the most out of this approach, it's important that the questions asked are systematic and comprehensive. After all, there would be no point identifying every feature and the intended customers of a new product, and starting to manufacture it if you haven't asked how you would bring it to that market. So it's worth going through a comprehensive, systematic questioning exercise every time you explore a new idea. The Starbursting technique is useful way of going about this. Starbursting is a form of brainstorming that focuses on generating questions rather than answers. It can be used iteratively, with further layers of questioning about the answers to the initial set of questions. For example, a colleague suggests a new design of ice skating boot. One

question you ask might be "Who is the customer?" Answer: skaters. But you need to go further than this to ensure that you target your promotions accurately: "What kind of skaters?" Answer: those who do a lot of jumping, who need extra support, and so on. This would help focus the marketing, for example to competition ice dancers and figure skaters, rather than ice rinks that buy boots to hire out to the general public.

h-

Stepladder Technique

The Stepladder Technique is a simple tool that manages how members enter the decision-making group. Developed by Steven Rogelberg, Janet Barnes-Farrell and Charles Lowe in 1992, it encourages all members to contribute on an individual level BEFORE being influenced by anyone else. This results in a wider variety of ideas, it prevents people from "hiding" within the group, and it helps people avoid being "stepped on" or overpowered by stronger, louder group members. All of this helps the group make better decisions. i-

Cost/Benefit Analysis

Evaluating Quantitatively Whether to Follow a Course of Action

You may have been intensely creative in generating solutions to a problem, and rigorous in your selection of the best one available. However, this solution may still not be worth implementing, as you may invest a lot of time and money in solving a problem that is not worthy of this effort. Cost Benefit Analysis or cba is a relatively* simple and widely used technique for deciding whether to make a change. As its name suggests, you simply add up the value of the benefits of a course of action, and subtract the costs associated with it. Costs are either one-off, or may be ongoing. Benefits are most often received over time. We build this effect of time into our analysis by calculating a payback period. This is the time it takes for the benefits of a change to repay its costs. Many companies look for payback on projects over a specified period of time e.g. three years.

j-

Decision Trees

Choosing Between Options by Projecting Likely Outcomes Decision Trees are useful tools for helping you to choose between several courses of action. They provide a highly effective structure within which you can explore options, and investigate the possible outcomes of choosing those options. They also help you to form a balanced picture of the risks and rewards associated with each possible course of action. This makes them particularly useful for choosing between different strategies, projects or investment opportunities, particularly when your resources are limited.

III- Risking 1)General Comments on Risk Taking 1. Only the risk takers are truly free. All decisions of consequence involve risk. 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 of dying by driving to the store, your house could collapse on you and kill you anyway.

3. You are supposed to be afraid when you risk. Admit your fears--of loss, of rejection, of failure. 4. Risking normally involves a degree of separation anxiety--the anxiety you feel whenever you are removed from something that makes you feel secure. Many children feel this when they first leave their parents for school. Some college students 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 between the familiar and secure and the new. Find out what the new place--school or country--is like and how its elements compare to familiar and secure things at home. 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. Find out about the new job, its location, the lifestyle of those who live there, and so on.

2)The

Orthodox

Theory

of

Risk

Evaluation The traditional strategy for evaluating risks is to use an expected value calculation, based on the simple idea that the expected value of a risk is the value of the possible outcome discounted by the probability of its realization. The formula is EV=PR or expected value equals prize times risk (or chance). Thus, if you 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 calculations are often used when comparing an amount of money to be invested with the probable payoff. (Note: if the risk is, for example, one in twenty, you can divide the prize by twenty, which is the same as multiplying the prize by one twentieth.) 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 twice 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.

3)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 take risks just to get revenge or to harm someone else. Don't risk when you are incapable of rational thought. 3. Have a goal. When you take a risk, have a clear purpose in mind so that you will know, after the fact, whether you succeeded or not. What will taking the risk accomplish? 4. Determine the possible loss as well as the gain. That is, know exactly what the 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 either to underestimate or to overestimate the consequences of risk. Underestimation can result in surprising damage, cost, setbacks, pain, whatever. But overestimation is just as problematic, because it can keep us from taking the risks we should 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 outcome 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 probability 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 probability 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. Simultaneous risking increases anxiety, creates confusion, and makes failure analysis very difficult. 7. Use imaging or role playing to work through the various possibilities, successes and failures, so that you will be mentally prepared for any outcome. Think about what can go right and what can go wrong and how you will respond to or adjust 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 the result of your risk will not be exactly what you had imagined and there will be more a degree of success than absolute success or failure.

4)Risk Management Strategies

In order of precedence, the strategies are: 1. Dismiss extremely remote or unrealistic possibilities. For example, in the decision, Shall I go to the store? there are risks like dying on the freeway, being shot by robbers, buying poisoned food, and so forth, but these should not normally enter into the risk evaluation because they are highly if not extremely improbable. Remember that all life is accompanied by risk. Ten thousand television sets catch fire each year, a hundred thousand people walk through plate glass each year, 125,000 doit-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 chance in 4000 each year of dying. And of course whenever you trust someone, you risk betrayal; when you open yourself, you risk exploitation or ridicule; whenever you hand over a dollar, you risk 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 apply. 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 uncertainty 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 by 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 consequences of modern life. 4. Maximize Expected Values. Normally, the expected value of each alternative shows its relative preferability. That is, you are opting for the greatest probability 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 dangerous sports like skiing, sky diving, race car driving and so forth. The risk/benefit ratio is acceptable to them. It may be useful to note here, too, that most people are not rational risk takers. They take some risks all out of proportion to any expected return and avoid other risks that have a large expected value compared to the risk.