Dealing with risk and uncertainty

Times are uncertain. Risks seem high. We may feel that the price of missteps is high; we know it's hard to decide what steps to take.

In situations such as this, how do you make decisions in and for your organization? How do you plan effective actions? How do you solve the inevitable problems that arise?

The German psychologist Dietrich Dörner, author of The Logic of Failure, has made a career of studying why people make mistakes and what we can do to improve. One of his key pieces of advice is to use computer simulation to get insight about the situations we face so that we can make better decisions in real life.

Perhaps today's uncertainties are your signal that the time is right to apply more systemic approaches in your work and to ground your planning, problem solving, and decision making with simulation that takes into account factors important to your business. Perhaps it's time to test and rehearse your plans before you implement them.

That's what we've been discussing here, and that's how I help others. If you're concerned that your standard approach to business may need augmentation in today's world, perhaps I can help you, too. Drop me an email or give me a call. There's no obligation—only opportunity.

Prediction, system dynamics, and Future-Fusion

Recently, I made the claim that we're better off focusing on adapting to the present than predicting the future. I've made similar claims in the past, too. I've even given one example in which predictions serve a useful purpose.

That's all a bit simplistic, of course. Even system dynamicists could be said to predict the future in a way: we show behavior over time we feel is more likely to occur (although we may warn people away from point predictions based on a behavior over time graph). In other words, I might suggest that your current policies could produce a boom and bust effect in your business, but I wouldn't want you to draw the conclusion that your business will grow another 172.3% by June 15, 2009 before taking a tumble that afternoon.

Because we all would like to know the future, I've experimented with blending system dynamics and Bayesian analysis to quantify the probability of a particular behavior pattern, for example. Of course, that probability is conditioned on both the historical data and the model being correct, which is a loophole big enough for a good-sized locomotive to run through: models are always incorrect. Still, I think this approach may give more useful insight in certain cases.

Now Kshanti Greene of Stottler Henke Assocates, Inc. has shown me a Bayesian tool they've developed called Future-Fusion, and I've been exploring it a bit. They are using Bayesian networks and the power of groups to get a better handle on what the future holds. Much as Data360 looks at the past, Future-Fusion attempts to look at the future. As of this writing, they've created four test areas which you can explore: the 2008 US presidential election, the Iraq war, corporate strategy, and energy. Try it out: learn how to use the system, see current predictions, and add your own (I think you only have to create a free account if you want to add your own predictions). Perhaps you'll learn something, and perhaps they will, too.

Kshanti has pointed out a recent addition to Future-Fusion that may intrigue some of you: time. They've enhanced their technology to allow limited dynamic execution of a network model, which begins to narrow the gap between Bayesian networks and system dynamics from the Bayesian network side, much as what I've tried has narrowed it from the system dynamics side. To try that out, go to the energy model, select a prediction (e.g., "Reduced SUV sales"), click "view graph," note the numbers, and then click "Next Time Step."

I think this is all still experimental in many ways, but it's a good opportunity to learn a bit about this technology by trying it out on real-life issues. I'll be curious what you discover.

Better decision making through lemonade??

I've written about good decision making a number of times, but I never included the effect of sweetened lemonade! Get the full research story.

While certainly interesting in its claims, this idea also has links to ideas about stocks and flows (your stock of glucose, etc.) and other systemic ideas. It also seems related to the notion that good nutrition can help, as Charlie Ayers claims in Food 2.0: Secrets from the Chef Who Fed Google (no, I haven't read this one yet, but it sounds delicious intriguing).

I sense the message that we need nutrition for at least three reasons: to survive (breathe, move blood through the body, etc.), to carry out physical activity, and to carry out mental activity. The process of doing those things (even mental activity) depletes nutritional stocks we've established, and thus we need to replenish them to be at our peak condition. (It may be that we need different types of nutrition for the different activities.) Of course, we also have to balance that with our overall accumulation of nutrition lest we find our weight increasing, and we have to watch the type of nutrition lest we find our teeth decaying or our bodies subject to various ills.

Thanks to Dan Goldstein of Decision Science News for the lead.

What he said

See Gill South's report about Systems Thinking, System Dynamics: Managing Change and Complexity by Kambiz E. Maani and Robert Y. Cavana.

The advice?

• Take the time to think.
  
• Patterns, not individual datapoints (problems), are key.
  
• If you want to change an event (fix a problem), you have to change the process (structure) that created the pattern of which the event is a part.
  

As some might say, it's all about context. Others might suggest it's about getting leverage.

If you're facing a challenge in your organization, are you looking at an individual event, or is there a pattern? What's the structure (process) that created that pattern? What can you do to change the structure so that the pattern changes in a way you want? Would you like to talk about it?