When Serena was compiling the sales projections for the upcoming quarter for the product she oversaw, she did all the math and came up with the most accurate estimations she could. In this article we will discuss the Power of Decision Making in Uncertain Times. Serena applied what she had learned during her graduate work in decision science and statistics.
She calculated an overall sales volume of 1,000 units using historical trends, economic calculations, and market estimations as her guides. She also calculated a 15% chance that sales would fall below 900 and a 15% chance that they would exceed 1,100. The CEO made the first remark after Serena completed outlining her forecast, scowling at her and said, “I don’t pay you to be uncertain.”
Many of us assume they desire flawless predictions given with complete assurance, much like Serena’s CEO did. The current economic climate has brought with it an especially sharp sense of fear for those people. The business press cites high inflation and sluggish economic growth together with solid employment figures and low unemployment.
Even though some government officials provide optimistic predictions and consoling words, there is a lot of conjecture in the headlines about whether a recession is imminent. It’s a complicated picture with a lot of unanswered questions. If a recession results in a drop in revenue, should your business invest in employing more employees or make cuts?
We have terrible news for you if you’re seeking for a surefire way to get certainty: the world is complicated, and markets are challenging to anticipate. However, there is good news if you are looking for strategies to deal with the future’s uncertainty. We are here to assist you how Power of Decision Making in Uncertain Times works. Tools exist for planning and making decisions while considering uncertainty.
Regardless matter whether there is war or peace in the globe, whether the economy is expanding or contracting, or if the market is bullish or bearish, these techniques are valuable in everyday life and in every economic situation. Here, we offer five tips for prospering in a complex environment.
Consider Expected Values
Choosing the route of action with the highest expected value is the essence of rationality. It is simple to calculate expected value simply multiplying the value by its likelihood. The expected value of a wager, for instance, that has a 50% chance of paying $20 is $10. You would ultimately win if you could play this wager every day for the rest of your life for a cost of $9. Even though you would lose $9 50% of the time, you should still take the chance every day. On losing days, you could feel bad that you were unlucky, but you shouldn’t regret choosing to play; given what you knew at the time, it was a wise decision.
In his early investment pitch for Amazon.com, Jeff Bezos used the theory of anticipated value. Although he recognised that his internet retail venture carried significant risk, he also saw a big potential reward. He forewarned the company’s early backers that there was a 70% chance he would fail, making their investment useless. But he asserted that the potential benefits associated with that 30% chance of success were sufficient to outweigh the 70% likelihood of failure. In actuality, a dollar invested in Amazon.com in 1997, when it went public, is now worth $1,840.
Let’s assume that, at the time of the IPO, there was a 30% probability of a return on investment of $1,840 and a 70% risk of failure. A dollar investment would thus have an expected value of $552, which is equal to $1,870 multiplied by 30%. A wise decision would be to invest given the predicted value.
The reasoning behind expected values recognises that the future is uncertain and that our choices should take it into account. Uncertainty in the world cannot all be eliminated. For instance, pretending you can predict the outcome of a coin toss or a roulette wheel is foolish. Similar to this, many of the social and economic institutions in which we participate are so intricately intertwined that it is practically impossible to forecast how they will behave.
The likelihood of each of the potential outcomes is estimated as a second method of forecasting. For instance, I can divide the possible temperature range into a number of ranges, each of which is 10 degrees broad. The highest chance attributed to any 10-degree range when estimating these likelihoods is often a little around 50%. Even if their 30% hit rate indicates that they are still overconfident, this is a great improvement.
Utilize the Advice of the Crowd
Even professionals frequently overestimate their abilities, and the majority of us have excessive faith in our ability to choose the ideal expert. Expert economists are consulted by The Wall Street Journal to forecast significant economic developments for the future year. Their forecasts are wildly inconsistent. How should the distribution of professional projections be used? Many people would follow the expert’s recommendations. In essence, that is what the Greek philosopher Socrates recommended.
Another strategy makes use of the collective wisdom of people. James Surowiecki asserted that basic methods for aggregating judgments within a group. Such as utilising a mean or median or a majority vote for yes/no decisions, generally outperform more complex decision-making strategies in his 2004 book that popularised that theory. Business professor Rick Larrick and his colleagues demonstrate the advantages of the “select-crowd” approach, which involves selecting a small group of subject-matter experts and averaging their viewpoints.
A better approach than picking the estimate of the best predictor from the previous year is to average the estimates of all the economists who participated in the WSJ survey. However, averaging the top five forecasters from the prior year performs better than averaging the predictions of all economists.
Our desire for certainty drives us to seek out a single expert, the one who can predict the future exactly. Be wary of any politician, businessperson, or leader who asserts confidence about the future. They exhibit more conceit than wisdom.
Assess Your Confidence
You could get the notion from reading a lot of self-help and business books that your life’s goal should be to boost your confidence. Why wouldn’t you want to have hope? Disney CEO Robert Iger stated in his 2019 autobiography, The Ride of My Life, that optimism is “one of the most crucial attributes of a strong leader.”
Wrong. Maximizing confidence can result in a variety of poor choices. Overconfidence in your potential profits could cause you to overspend. If you believe you are unbeatable, you might take risks that limit your life expectancy. Being overconfident in your popularity can cause you to act in ways that are rude and obnoxious. Overconfidence in your ability to succeed can make you less willing to put up the work needed to do so.
Keeping tabs and keeping score might be a helpful strategy to improve your confidence calibration. Develop the habit of predicting uncertain events with a high degree of probability. Then assess how often you were correct by looking back. How frequently did you actually believe you would meet a deadline if you said you had 90% confidence? Nine out of ten times, if your confidence is “calibrated” precisely, you would have met the deadline.
By gathering forecasts and scoring them later, managers can assist people in their organisations in becoming better at calibrating their confidence. Will a construction project proceed according to plan? Will the project remain within its budget? All estimations of these probability should be recorded, scored, and made public afterwards.
To make individuals aware of their own accuracy, share the results. Insist on candour from those who submit reports to you about their uncertainties. Do not behave in the same manner as Serena’s supervisor, who promoted erroneous and overconfident forecasts by expecting certainty.
Shield Your Bets
Serena is one such person who is at ease with uncertainty and views the future as a distribution of potential outcomes. But decision-making is still necessary for everyone. How many units ought Serena’s team to put out? She is unable to generate a probability distribution. Simply taking the probability distribution’s mean is the straightforward solution.
However, that straightforward response presupposes symmetric costs of over- and under-estimating. Creating too few ventilators could result in avoidable fatalities if Serena is providing them to the sickest Covid patients. But producing too many ventilators just necessitates storing them for future use. Serena should err on the side of overproduction in this situation.
Another illustration would be the unknown length of time required to travel to the airport and pass through security. You err on the early side since missing your flight by a minute is worse than having to wait at the gate for a minute. The earlier you leave for the airport, the more unpredictable the situation is. And the earlier you should arrive, the harder it will probably be to obtain a later flight. On the other side, if you arrive at the gate more than an hour early every time, you might be being overly cautious.
It’s possible that Serena’s supervisor expected her executives to have accurate foresight. Serena’s measured confidence, though, enables the company to create backup plans for an ambiguous future. By hedging their bets, the corporation can predict where they will be able to swiftly locate more employees should sales begin to increase. In the event that sales decline and the company needs fewer employees. The same rationale can enable the business to keep an eye on open positions elsewhere in the organisation.
Transmit Uncertainty Confidently
We encourage leaders to distinguish between the certainty of their predictions and the confidence with which they report what they know. To come out as determined, you don’t have to act as if you can accurately anticipate an uncertain future. Researchers Joe Simmons and Celia Gaertig have discovered how to thread this needle.
The most reliable predictions, according to Gaertig and Simmons, expressed uncertainty while being optimistic, like in the following sentence: “I am confident the Golden State Warriors have a 60% chance of winning their next game.” Contrarily, the researchers discovered that categorical forecasts made with a low degree of certainty were met with the greatest scepticism by audiences: “I’m not sure, but I think the Warriors will win their next game.”
Too many leaders believe that in order to maintain their credibility, they must project excessive amounts of confidence. This is incorrect and puts their reputations in danger when their predictions turn out to be inaccurate. In fact, leaders’ credibility should be damaged even before their confident prediction is proven to be incorrect if they act as though they are certain about outcomes that are fundamentally uncertain. Instead, wise leaders would gather sufficient data to be able to convey the level of uncertainty with confidence.
There is much ambiguity in the world. Ignoring this ambiguity and asserting that you can make accurate forecasts is either dishonest or naive. When you accurately account for uncertainty in your own thought processes and expected value calculations, you will make better decisions. Furthermore, helping those around you effectively comprehend uncertainty, quantify it, and perform better expected value calculations can make you a better leader. Better judgments with higher expected values will be the outcome.
The lesson is to become as knowledgeable as possible about the unknowns in our complicated environment. Think openly about how unpredictable the future is. Make the most accurate probability estimations you can, then use them to calculate predicted values as precisely as possible. You’ll never be able to be positive that they are correct, and you’ll constantly wish you had more knowledge to ease your confusion. However, if you maintain tabs on things and keep score, you and your coworkers can gradually improve your calibration. We are confident that it will be worthwhile.
We regret to inform you that there is no foolproof plan for attaining certainty because the world is complex and markets are unpredictable. In this article we discussed how Power of Decision Making in Uncertain Times helps in various ways. However, there is good news if you are looking for strategies to deal with the future’s uncertainty. Tools exist for planning and making decisions while considering uncertainty.
Regardless matter whether there is war or peace in the globe, whether the economy is expanding or declining, or whether we are in a bull or bear market, these techniques are valuable in everyday life and in every economic situation.
Here, we present five strategies for succeeding in an uncertain world: expected value, the wisdom of the crowd, confidence calibration, hedging, and confidently communicating uncertainty.