Decision-Makers Stay Humble in Predicting Business future
Decision-makers stay humble in predicting business future. In 2023, management teams face testing times as unexpected and extreme developments spill over from 2022. The volatility of energy prices, supply chains, interest rates, health uncertainties, and geopolitical tensions are challenging even the most confident decision-makers.
McKinsey & Company acknowledges the complexity of the current world and advises caution rather than overconfidence. While predicting the future has always been difficult, leaders continue to be surprised by rare events, known as “black swans.” Despite this, there is still a tendency for leaders and experts to be overly optimistic in their predictions.
Decision-makers stay humble in predicting business future: Rationality + Intuition = Black Swan Defense
Researchers in decision theory have been developing a model that addresses a wide range of problems, from known and calculated probabilities to situations with unknown and uncomputable probabilities due to unique circumstances like global warming or pandemics.
Their approach aims to avoid the black swan effect by combining mathematically-based theories, like the Bayesian approach, with less demanding models that allow decision-makers to admit their ignorance on specific issues. While decision theory can sharpen and test intuition, it cannot replace it entirely, and formal models can help avoid biases and errors when relying on intuition.
The model should be flexible for decision-makers to test their intuition in novel and complex situations, using probabilities based on similar past cases and theories. It suggests decisions should consider past successes or failures, requiring intuition and insight, while the formal model helps avoid biases like the recency effect.
A Case In Point
In a hypothetical case, the directors of an airline company are seeking funding for new security technology. Three potential investors evaluate the proposal from different angles. Abe analyzes the technology’s efficacy, competition, clinical trial costs, insurance coverage, and potential profits. After a thorough investigation, he finds the investment relatively promising.
In the case of seeking funding for new security technology in an airline company, Abe is relatively optimistic based on his analysis. However, Eleanor, with more experience, is doubtful due to past project failures. She considers both future scenarios and past cases, giving less weight to future possibilities.
Tamar, an inexperienced investor, is also skeptical, highlighting the limitations of calculations in capturing all relevant possibilities. Eleanor’s more extensive database of past airline crashes makes her more cautious despite agreeing with Abe on the probability of success. Tamar’s cautious intuition is influenced by her limited information on past disasters and her cognitive style.
Leaders, anticipate the unexpected and avoid arrogance in predictions
The three investors, despite receiving identical proposals, have varying decision-making approaches. People may analyze the same situation differently, emphasizing either case-based or theory-based reasoning, leading to distinct conclusions.
While abstract mathematical models are valuable for decision-making in some cases, they may not provide the right answer in complex and unique situations where assigning probabilities is challenging. In such cases, one should expect unexpected events, like black swans, even though their arrival time cannot be predicted. The focus should be on expecting the unexpected and maintaining humility in predictions.
The authors advocate for a humbler view of theory, combining formal decision-making theories with social and psychological responses that reflect how people behave. This approach aims to bridge the gap between elegant mathematical models and the complexity of real-world reality.
Read the original Article on forbes.
Read more: Impressions Count and Impact the Decisions We Make Later.
