Decision-Making – Evaluating Decision Options, part 1 of 3
Decision-making often involves trade-offs. Risk aversion suggests that all things being equal, decision-makers will select the option having the lowest risk. But because all things are never quite equal, decision-makers concede items they deem to be of lesser value to items they believe hold greater value with risk being one of the commodities considered.[wcm_restrict plans=”49204, 25542, 25653″]
Decisions involve a choice between two or more complex options. This complexity is a result of the multiple characteristics that define each option and will impact the probability of achieving a desired outcome. In making a selection, the decision-maker is attempting to choose the mix of characteristics that will most optimally achieve the desired result.
Step 1: Evaluation of Value-Adding Characteristics
Performing this step requires that the decision-maker or decision-making team first identify the critical value-adding option characteristics necessary for achieving a desired outcome. These characteristics can be categorized as:
- Required: critical characteristic with a required minimum satisfaction point threshold below which an unacceptable outcome will result. Note that all decision options possess at least four required characteristics: risk, cost, ethic, and total value.
- Important: non-critical characteristics that add to the option’s overall value
- Nice-to-Have: non-critical characteristics contributing only nominal value
The principle of diminishing marginal returns helps illustrate the process by which each option characteristic is evaluated. In the decision case, as the intensity of a characteristic is increased: 1) the level of need satisfaction will increase at an increasing rate, then 2) at the point of need fulfillment will increase at a decreasing rate, until 3) at the point of need saturation any addition to the characteristic’s intensity is excessive and total value contribution declines. (See Figure 1 below.)
Figure 1: Decision Characteristic Evaluation Curve
In using this model, it is important for a decision-maker to identify the need satisfaction threshold for each option characteristic. Once this is done, the characteristics of each option are evaluated for their value contribution in preparation for value aggregation and option selection.[/wcm_restrict][wcm_nonmember plans=”49204, 25542, 25653″]
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About the Author
Nathan Ives is a StrategyDriven Principal and Host of the StrategyDriven Podcast. For over twenty years, he has served as trusted advisor to executives and managers at dozens of Fortune 500 and smaller companies in the areas of management effectiveness, organizational development, and process improvement. To read Nathan’s complete biography, click here.