Wednesday 25 November 2009

When things go wrong: Towards better decision making

In business, we tend to judge people by the results of their actions.  Many performance management systems are oriented in this way, placing a strong emphasis on management by results.  Realise upsides and you reap rewards and promotion; realise downsides and you are blamed and maybe even fired.

To most managers, this seems a natural way to 'encourage' and 'motivate' people to 'improve'.  If we reframe the argument in terms of decision quality, rather than result quality, the picture changes.  People's 'mistakes' indicate that they are willing to make decisions, and it is only by making decisions and observing the results that we can improve.  We learn about novel, unfamiliar or complex things through experiment and error.

A study of financial traders showed, it is a serious error for decision makers to assume that bad results mean a bad strategy, just as it is to asume that making money was because you have a good strategy.  In business, as in markets, luck plays a part, and the best managers are like the best traders in having an accurate and sufficiently modest view of which results to attribute to skill, and which to serendipity.

Business results are the outcome of the interaction between our decisions, our actions and chance.  Even if we make no error, there is always the cahnce that a bad outcome will result from a 'good' decision.  For example, we might play dice game version A (http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html) ten times and lose every time, despite having established that hte risk had a positive expected value.  But how would such a decision be regarded in business?

No comments: