My years in graduate school were spent in an interdisciplinary doctoral program on judgment and decision making. The faculty were drawn from a variety of fields including economics, management, psychology and marketing. In my second semester, I took a course on decision analysis that centered on the processes undertaken by those who face choices in environments of uncertainty. I’ve been thinking a lot about the lessons from that course while observing the volatility of the financial markets over the last several weeks.
One key element of successful decision-making is the ability to predict, with some level of confidence, what the implications of choosing one option or another will be. Appropriate data gathering aids us in simplifying these predictions and allows us to move along in our decision-making. As one’s accuracy in predicting consequences of potential choices rises, the decision process begins to resemble a relatively straightforward trade-off scenario involving the comparison of one bundle of consequences with another.
In times of great uncertainty, however, the process can be dramatically different. Calculating the likelihood of certain occurrences, especially significantly negative consequences, becomes the most important part of the decision. Decision makers are often trying to determine whether a given set of outcomes meets some threshold, which is usually tied to their attitudes about risk. If a decision-maker is unable to make this determination, because reliable data is too hard to find, the result is often inaction.
I’m not thinking only of investment decisions. The same kind of thinking might be found in job seekers this fall and next spring. I bet some of them are doing their best to gather information that will help them determine whether the firm they are considering will even exist in year or two. In previous recruiting cycles, this would not have been a part of the equation. Now that it is, the difficulty lies in establishing the likelihood of the firm going out of business. Suddenly, the stability of a firm or an industry carries a heavier weight and leads to very different choices.
