Understanding Uncertainty

Understanding Uncertainty

Life is full of uncertainty!

Don’t judge quality of a decision by how well it turns out.

Distinguish good choices from good consequences

Good choice / bad consequence

Bad choice / good consequence

1

Acknowledge existence of uncertainty. . .

then systematically evaluate uncertainties

For each major alternative, ask:

For each major alternative, ask:

What might happen? (outcome)

What is the likelihood it will happen? (chance)

For each major alternative, ask: What will be its potential impact?

Sam’s big opportunity

(consequence)

2

Alternative: Bid on Contract Uncertainty: Government Response to the Bid Outcome

Chance

Consequences

No Contract

Least Likely

Partial Contract

Most Likely

Bad- need to reduce staff, borrow heavily, scramble for small contracts Good – more stability, decent profit

Full Contract

Somewhat Likely

Risk Profiles: A Closer Look

Great – very profitable, professionally interesting, enhance reputation

Identify key uncertainties

Identify key uncertainties

Significantly influence consequences

Consider alternatives separately

Identify key uncertainties

To identify key uncertainties

Consider uncertainties one at a time

3

If I choose this alternative…

ASK YOURSELF…

What requirements for success have I missed?

If I choose this alternative…

If I choose this alternative…

What factors could harm its acceptance or its implementation?

What kinds of changes could harm its long-term success ?

If I choose this alternative…

If I choose this alternative…

What kinds of external changes could harm its long-term success?

What kinds of things tend to cause problems in implementing this type of decision?

4

Define outcomes Assign Chances

How Many? How to describe?

Consult existing information

Use your judgment

Ask Experts Collect new data

5

Alt 1: Attend game & reschedule to Sunday

Which flight?

Alt 2: Stick with original plan

Alt 3: Attend game & reschedule flight later that night Uncertainty: Will the flight be late and, if so, how late? Outcome

Chance

Arrives at Dulles no more than 30” late

80%

Arrives at Dulles more than 30” late

20%

Consequences Great! Will meet Mom & make flight to London Bad. Will miss connecting flight. Will incur hotel expenses for Mom & me. Will have to pay $800 in reticketing.

Alt 3: Attend game & reschedule flight later that night

Clarify the consequences Written Qualitative Quantitative

6

Clarify the consequences

Clarify the consequences

Seriousness

Seriousness Likelihood

The Gibson’s House Purchase

The Gibson’s House Purchase Musts: Down payment < $20,000 Monthly payment < $2,000 Bedrooms: 4+ Bathrooms: 2+ Location: Not downtown or 45 minutes+ Occupancy: w/in 60 days

Wants (continued): Shelter for 2 cars Public transportation nearby Convenient to schools Convenient to shopping, etc. Workshop & storage space Stable resale value Attractive modern style Good landscaping Large play area for kids Large, modern kitchen w/view Large comfortable family room Quiet Street, good neighborhood Minimum maintenance costs Minimum risks – tax increase

Wants: Minimum down payment Low monthly payment Location convenient to work Use present furnishings, drapes, etc.

Musts Analysis

Wants Analysis Using importance & achievement scores

Musts

House A

House B

House C

Down Payment < $20,000

$17,500

$19,500

$16,000

Monthly payment < $2,000

$2,000

$2,500 NO GO

$1,600

House A Wants

Wt.

House C

Sc.

WS

Sc.

WS

Minimum down payment

6

$17,500

9

54

$16,000

10

60

Lowest monthly payment

10

$2,000

9

90

$1,600

10

100

Location convenient to work

7

Good

10

70

OK

8

56

4 + Bedrooms

4

4

Use present furnishing, drapes

5

Good

8

40

Very good

10

50

Shelter for 2 cars

4

Carport

7

28

Garage

10

40

2+ baths

2

2

Public transportation near

4

Bus

9

36

Bus close

10

40

30 minutes 45 days

22 minutes 45 days

Convenient to schools

8

.5 mile

7

56

.25 mile

10

80

Convenient to shopping, etc.

7

I mile

7

49

.5 mile

10

70

Workshop & storage space

2

Large

10

20

Poor

3

6

Stable resale value

7

Good

10

70

Good

10

70

Not downtown or 45 minutes+ Occupancy within 60 days

7

Adverse Consequences

Wants Analysis

House Purchase Example House A Wants

Wt.

Sc.

House A

House C WS

Sc.

WS

Pro.

Ser.

Hi

Med

20

Awkward social relations subordinate neighbor

0

0

Few playmates for children

Med Med

Fair

8

32

70

Average

8

56

28

Low

10

Attractive modern style

5

Good

8

40

Excellent

10

50

Good landscaping

4

New

10

40

OK

7

28

Large play area for kids

5

Unfenced

7

35

Fenced

10

50

Large, modern kitchen w, view

2

Good

10

20

Good

10

Large comfortable family room

3

Yes

10

30

None

Quiet street, good neighborhood

4

Good

10

40

Minimum maintenance costs

7

Good

10

Minimum risk- tax increase

4

High

4

Performance Total Want Objectives

House C

804

40

848

Pro.

Ser.

Risk of basement flooding - major repairs

Hi

Hi

Heavier Traffic from new shopping center

Med Hi

Inconvenience of Country Club across town

Hi

Hi

Poor land for wife’s gardening

Hi

Hi

Adverse Consequences House Purchase Example House A Pro.

House C Ser.

Awkward social relations subordinate neighbor

Hi

Few playmates for children

Med Med

Med

Pro.

Ser.

Risk of basement flooding - major repairs

Hi

Hi

Heavier Traffic from new shopping center

Med Hi

Inconvenience of Country Club across town

Hi

Hi

Poor land for wife’s gardening

Hi

Hi

Risks don’t “cancel out” other risks.

Janet’s Summer Party

Janet’s Summer Party

Uncertainty: Outcome

What will the weather do? Chance

Consequences

Rain

Less likely

Picnic a flop

Sunny

Most likely

Picnic a huge success

8

Should the results of the risk profile override your best choice?

9