Invited Perspective: Making Decisions 2.0
What is more integral to the exploration and production (E&P) business than making decisions? In many ways it is the essence of business. Every day we have to choose between “rocks and hard places.” If you get it right, you are a genius. If you get it wrong, there is usually a good reason why, like a “perfect storm” suddenly conspiring to invalidate the assumptions underpinning your decision or perhaps an “unknown unknown.” Nassim Taleb’s book Fooled By Randomness: The Hidden Role of Chance in Life and in the Markets suggests there may not always be a brilliant strategy and excellent decisions behind business success.
Most companies today have formal devil’s advocates (risk councils, peer reviews, controllers) trying to pick apart decisions and recommendations, trying to make sure only good decisions are allowed to be made. In addition, most companies have introduced formal “decision gate processes” for material (investment) decisions. According to Independent Project Analysis (IPA) these decision improvement measures really have not improved things appreciably. The expected case never happens and the decision maker is usually handed actual outcomes that are inferior to what was presented as expected in the decision support package.
More and more, it is not just about making the most money. Every company has corporate values against which all decisions must be tested and the “triple bottom line” (at least) makes it necessary to factor in many other elements. I sat down with an expert in the field of making decisions Patrick Leach, chief executive officer of Decision Strategies, to get his perspective on the 2.0 of making good decisions in 2015—something every SPE member would like to do well—at work and at home.
With a VUCA (volatile, uncertain, complex, and ambiguous) future, how can you make solid decisions you will not regret? How can you make a forward road map when the mountains are moving?
A dynamic landscape requires dynamic, non-linear thinking. If you and your team plan a route in great detail but barriers arise unannounced, you almost certainly will fail to reach your objective. Compare this to a flock of birds. They travel without a detailed plan, but rather use a simple set of rules to modify their flight plan as they go (fly roughly in a certain direction, do not run into anything, try to stay equidistant from one another, etc.). They get to their destination regardless of any unforeseen obstructions. Similar logic goes a long way in business. Do not try to forecast the future. Instead, try to understand the range of possible outcomes associated with various strategies, get an approximate estimate of the probabilities associated with those outcomes, identify key signposts, put in place policies to guide your personnel’s decisions, and expect the route to change as your people incorporate new information and find clever solutions as problems arise.
What is a good decision? And, when do you know it is?
A good decision (or strategy) is one that:
- Strikes the appropriate balance between competing objectives
- Has the best probability of allowing you to accomplish those objectives, given the uncertainties we all face
Should you always decide with a view to the long-term rather than the short-term—or vice versa?
It is tempting to say always think long-term, just because short-termism is such a pervasive problem these days. Many of the biggest problems we face stem from the fact that our economic metrics are strongly biased in favor of the short-term. But having a long-term view does not do you much good if you go out of business in the short-term, so a balance is needed. But I would reiterate: far more companies are too short-term in their view than are too long-term in their view. That goes for societies, too.
How much flexibility should you pay for when it is so expensive and may not be needed?
It is easy to calculate (well, estimate) the value of flexibility if we assume we are risk-neutral (i.e., we will always opt for the alternative with the higher expected value, or mean value). But we rarely are truly risk-neutral (even when we should be), so it becomes more complicated than that.
Does it help, really to show the worst and the best outcome that can happen—if the expected outcome never happens?
The absolute best and worst scenarios are rarely helpful. What is far more helpful is to consider the worst outcome you think you can live with, and then see how much of the curve lies below that point. Are there mitigating steps you can and should take? Likewise on the upside potential, find a decision threshold—i.e., a point “X” where if things go better than “X” we will wish we had done something different to take greater advantage of the opportunity. How much of the curve lies above this threshold? Are there any actions we could take today to position ourselves to take advantage of that upside if it comes to pass? How much would those actions cost us? This is option thinking and it is not exercised nearly enough in business.
Are sensitivities and scenarios even worth looking into when IPA says we are outside our own P10 and P90 with our field development forecasts more than 40% of the time?
The answer is not to stop thinking probabilistically. The answer is to learn from our mistakes and get better at estimating P10s and P90s.
Should decisions always be based on hard numbers and not intuition or gut feeling?
Numbers should supplement intuition, judgment, and experience, not supplant them. We crunch numbers to gain non-intuitive insights, not to delegate the decision to a model. If the model results contradict our gut feeling, a smart decision maker re-thinks his or her intuition, but does not necessarily overrule it.
Do you have to develop your own decision making style? If yes, how do you do that?
Everyone has his or her own decision-making style, whether he or she consciously develop one or not. The challenges are:
- Having the humility (or if you prefer, having a solid enough ego) to accept the notion that even if we are good at making decisions, we will become better by adopting a structured framework for thinking our way through complex problems
- Being flexible enough to move away from our natural style when another approach is more appropriate
Should you ask a lot of smart people what they think before you decide?
Yes. It depends on what you mean by a lot, but in general, yes, with the stipulation that those smart people should have very different backgrounds and perspectives from you and preferably from each other (such as the Abraham Lincoln approach as described in Doris Kearns Goodwin’s book Team of Rivals.)
Is not making a decision, the worst decision in a way?
A conscious decision not to make a certain decision right now is fine; refusing to make a decision that really ought to be made now is not.
Should you sleep on it?
If possible, yes. Almost always.
What “decision support package” should you ask for?
A good decision support package clearly lays out:
- Where we were and what the situation was when we started thinking about this problem
- What our objectives are and what the trade-offs are between competing objectives
- What strategic decision alternatives have been considered
- What we have learned through whatever brainstorming, analyses, etc. we have done
- What we believe the range of possible outcomes associated with our strategic alternatives to be
- What we are recommending, and why
What can we do with the problem of making decisions based on forecasts that are way too optimistic? Why are we seemingly always wrong in the too optimistic direction?
We are fighting human nature. Once someone becomes involved in a project or a strategic initiative, the impulse to want it to go well is enormous. There are expert interview techniques which help with de-biasing and other problems, but we are still ultimately dealing with human beings whose judgments are often flawed.
What are the five most important rules for making good decisions?
- Have a clear understanding of the problem or situation
- Be clear about what your objectives are, and what the tradeoffs are between those objectives
- Generate a manageable number of creative strategic decision alternatives that represent significantly different approaches
- Understand the range of possible outcomes associated with those alternatives, given the uncertainties in the world
- Use the analyses (quantitative or qualitative) of those alternatives to find a hybrid approach that is better than any of the initial alternatives considered
Are strengths, weaknesses, opportunities and threats (SWOTs) even worth it? Are pros and cons lists a must before you land on yes or no?
Usually. Exercises like these do not take long and sometimes bring out issues we have not considered yet.
What are the key decision biases affecting us?
Too numerous to name. Two big ones are:
- Personal experience. Even an extremely knowledgeable individual’s personal experience represents only a tiny slice of the global experience in any given area. It can blind us to the real probabilities. Try convincing someone who has had a lot of trouble with a car made by company “X” that it actually makes very reliable cars.
- The human tendency to seek out and preferentially believe information that reaffirms what we already believe or want to believe.
Are we always rational in high-up corporate decisions?
What about those “black swans” or low-probability-high impact events (Taleb’s book The Black Swan)—and our failure of imagination leading to our outcome ranges being too narrow?
Black swans are typical of complex situations—literally complex, as in complexity science (formerly known as chaos theory). According to David Snowden, renowned knowledge management researcher, probabilistic modeling of complex situations is extremely difficult and is usually of little use, since even a small difference in starting conditions can result in wildly different outcomes (the “butterfly effect”). Snowden’s theory is that complex situations require us to run pilots. We test various possible strategic approaches, and solutions emerge. Taleb’s approach is to gravitate toward assets which benefit from volatility (referred to as “antifragile”). If your portfolio consists of opportunities with limited downside risk and nearly unlimited upside potential (like financial options), even if the vast majority of them crash, the few successes will cause your overall portfolio to do well. There is truth in both approaches, but I find Snowden’s to be more practical.
It also closes the loop on this discussion nicely, since testing different approaches is a natural result of giving your decision makers policy guidelines, and then freeing them to use their judgment to find creative solutions (as I mentioned in response to your first question).
Decisions, Decisions, Decisions
So, there you have it. Decisions, decisions, decisions … every day we all make loads of them. Ranging from easy and trivial (Should I buy a small or large coffee?) to profound and transformational (Should we hire “X” as our new CEO? Which blocks do we go for in Round 1 in Mexico? Should we acquire Company Y?). In my view, good leaders largely follow Leach’s advice above, respecting that decision making also is a science, and look to their direct reports for their final recommendations, all things considered. But, they do one more thing, they have secured front-line information from those in the company closest to the action by asking a lot of detailed questions leaning over tables and maps in their offices, pretending to be just curious!
Once made, the key is to implement the decision and follow through. No rematch is allowed. Since success is never final, leaders should be carefully selected for the phase the business is in. When you start up something new, you want a risk-taker personality type leader. When you want to run something really well, you want a care-taker type. And when you have to shut something down, you want an under-taker type person to head things up and to make the difficult decisions.
In a long career, you will make a huge portfolio of decisions and there will be as many roads not traveled as roads traveled. Learn from the past and from others, but look forward, not backward. Remember what 1,000 65-year olds said when asked: If you lived your life over again, what would you have done differently? Among the top answers was: I should have taken more risks. Think about it!
Invited Perspective: Making Decisions 2.0
Helge Hove Haldorsen, 2015 SPE President, and Patrick Leach, Chief Executive Officer, Decision Strategies
01 March 2015
09 February 2018
12 February 2018
09 February 2018
20 February 2018
14 February 2018