Powering up your insight to make the future a little more certain
August 22, 2014
I introduced the concept of bracketing in an earlier post. When you apply bracketing to a situation, you want to see the limits of the upside and the downside potential. In that way, you can have a sense of the spread of uncertainty of that particular option.
In most situations, you will find the spread very large and to make a decision based on whether we will be at the top end or the bottom end of the bracket is difficult. Even the most likely scenario, which is based on tweaking each assumption to what you know of the situation at present, may miss the mark. With such variability, there is still a need to assuage our loss aversion bias, building in greater confidence in our execution. So we power up our insight with sensitivity analysis.
This is the process where we vary the inputs of our assumptions within the the brackets and see how the situation changes. By making different input changes, we can get a sense of the magnitude of the swings. Of course we hope there won't be huge swings because if that were the case, we will probably be in for a bumpy ride if this option were chosen. And most people don't like bumpy rides, no matter the upside. So sensitivity analysis really looks at how sensitive our option is to changes in the decision inputs, particularly our assumptions, and the range and volatility of these swings.
This begs the question, "So what?" So what if there is decision volatility? So what if the range of outcomes is huge? After all, if we need to make the decision, we need to make the decision.
Yes, the decision has to be made. But there are some options that people would decidedly stay away from because of its volatility. And unless we can somehow mitigate the outcome swings, and make the future less unpredictable, these may be rejected in favour of predictability, albeit at a lower return. This may result in rejecting a clearly superior option in favour of a greater sense of certainty.
Tania is looking to boost her career prospects given an offer to take up an overseas job posting by her company. After all the considerations, she has decided not to take the overseas offer and came down to two options; this is one of them: "Go onto a different career path in my company". Her assumptions in relation to this are:
1. There are job openings
2. There are no better candidates
3. My supervisor agrees to let me go
4. There is support for my future development despite me turning them down for the overseas job
If all her assumptions are correct, then, she will stay, jump onto a new career track, and contribute as much as she can. Of course, she will need to confirm the job grade, salary grade, and the training provided.
This is where it gets tricky. If all her assumptions were wrong, by making her intentions known about seeking a new job posting after turning down the offer may make her current job a living hell, what with her supervisor not supporting her application and there was no support for her future development. In this case, it would be best to leave the company!
So there is great variability within this bracket. By tweaking different assumptions to test the sensitivity of this option, she realises that even if there were job openings and there were no better candidates, if she doesn't get support from her supervisor, this option is very danagerous. And even if the supervisor is agreeable but HR is not, there will also be limited opportunities to meet her intent. And seeing that her supervisor has been vehemently trying to get her to take the overseas assignment, turning him down might just create a bad situation going forward.
This option has too much variability and the downside is something that Tania cannot stomach. As a result, even if this option passed through many hoops during the decision phase, it finally got its wind knocked out of it through sensitivity analysis. It's better that she doesn't take the risk this option has.
Decision-making is all about managing uncertainty
Are you a risk taker, or are you a risk avoider? This will allude to the type of variability that you can stomach, about the uncertainties that you have to manage. If you are going to make a decision where there has not been any precedence set, and there is no way of telling how the decision will react, you must apply bracketing and sensitivity analysis. You would want at least to understand what you can do to dampen the swings, and create some structure in the decision.
That is how you power up your insight to make your future a little more certain!