Sound Reasoning

Tuesday, 21 December 2010

Sound reasoning is the logic that knits together and distils the Frame, Alternatives, Information and Preferences into a single clear choice. It is the fifth dimension of decision quality.

There is also an aspect of communication if the decision analyst and the decision maker are different people. Decision makers need to understand clearly the logical implications of the choices they face. And if there is uncertainty—there almost always is—we need to be even more careful to communicate clearly about the lottery each choice represents.

For most practical business strategy problems, the key reasoning tool is a spreadsheet that calculates, for any given set of inputs, all the outputs that the decision maker cares about. The advanced Excel modelling techniques to do this efficiently and without error are a whole series of articles in their own right. Other modelling software might be used, but Microsoft Excel is my tool of choice, because it is ubiquitous and all my clients can work with it.

Tools:

Modelling the consequences of alternatives
Sensitivity analysis
Decision tree
Value of information

Failure Modes:

Wrong logic for this decision
Models too cumbersome to enable sensitivity analysis and probabilistic analysis
Relying only on a handful of deterministic cases
Ignoring interdependencies

100% decision quality is when the best choice is clear. We have reliable analysis of each alternative. Uncertainty, dependencies and complexities are accounted for, and the analysis is “as simple as possible and no simpler”.

I see many cases where decision making is driven by some huge, very detailed, model that calculates, at best, a handful of possible futures. Decision making is more a leap of faith than a reasoned judgement. How does it work in your organisation?

This article is one of a series looking at the six dimensions of decision quality.