Risk Management and Decision Taking

Decision and mental Models

Mental Models, this is what we all use to analyze a situation, connect the dots, draw concusions and make decisions.
Being aware of them, their potential to help to get through the complkexity and ambiguity of many, if not most situations, but also to be aware of the cognitive bias that will affect all stages of the process of getting information, interpreting them and drawing conclusions, is a critical part of the education towards critical thinking. the heart of innovation. More on this at medium.com

Risk Management would be simple if predicting likelyhood and severity of possible scenarios would be easy to do. In this case, the Risk Matrix is providing a good methodology. It is described at this link. It is a necessary step for any project anyway. But for projects in highly volatile envisonments, or with a high level of innovation, such matrices can be deceptive. In such case, the SCRUM or AGILE methodology has to replace a linear project management,. 

Decision Theory and mathematics

Fundamentally, decision theories are an extension of the Prisoners Dilemna where 2 prisoners in different cells have to decide to cooperate with the police for leniency,or trust their buddy and not confess, therefore leaving free. There are endless Bayesian mathematics beyond this, including the utility theory that states that we are more adverse to losses than to gains of the same magnitude.The mathematics for all this, while easily complex,  are pretty much established. While these models can be of great help, and be truly useful to managerial decisions, they assume that we know what we know and what we don't know, that we have scenarios and can attach probabilities to each, and that the decision maker behaves rationally.  A lot of assumptions ultimately. 

Decision beyond the mathematics: the bloody human factor!

The benefits and limits to the mathematical decision theory were at all time clear, but once the mathematics were decently fixed, as a result of the Operation Research developments after the 2nd World War, the research shifted to better understanding the limits of the human brain in this. Neurosciences were supposed to help here as well. 

We admit that our brain generates cognitive bias, the type of things that will corrupt our judgment and make us take wrong decisions: the ubris, the screening of information, preconceptions, etc...

Cognition biais has been the topic of research, well summarized in this article of the New-Yorker ("why facts don't change ur mind"): we screen information that will confirm our judgment values, and our reasoning tends not to objectively confront facts, but build  a mental model, based on selected information, screened or weighted accordingly, that will reinforce a mental model that support our set of beliefs. 

In this article by McKinsey, Companies are vulnerable to misconceptions, biases, and plain old lies with decision bias from distortions and deception. But they are not hopelessly vulnerable provided awareness and proper diagnostic is committed, and corrective action and behaviour is enforced. More by McKinsey on this here!

Several patterns of cognition bias have been identified, from confrmation bias, false analogies, sunk-cost fallacy, social (group-think) bias, etc..., that can even end-up embedded into algorithms. 

Influencing behaviours and decision process through nudging is also a "science" on the rise, even in policy development. 

The Black Swan

 The Black Swan is a highly dangerous bird for project managers, as by definition, it will hit when unexpected. The Black Swan Theory was popularized by Nassim Nicholas Taleb, and elaborates on the disproportionate role of high-profile and rare events that are hard-to-predict, and are beyond the realm of normal expectations in history, science, finance, and technology. More on this here! These are also typically events in situations where intuition can be a bad guide in decision process (see below).

Intuition and Decision

This is a topic that deserves a special attention, because it goes through the hubris and the cognition biais and beyond. Intuition can be a great help in some special situations, for example in emergency situation or when complex decisions have to be taken rapidly, e.g. for special forces soldiers in engagement. Intuition is first of all a transfer of situations captured in the short term memory into the long term memory, and therefore enabling the brain to treat far more information than normally and far more rapidly by integrating experience. However,  when the intuition is not relying on such experience, it can be a also bad guide. 

This is a topic that was extensively researched, especially by Daniel Kahneman, who got a nobel prize for exploring these directions.

Managers MUST be aware of this, and understand when intuition can be a good or a bad guide. Again, Kahneman, in an interview with Cognition Expert Gary Klein, elaborates on this: Intuition works well in a domain we are familiar with, but can be a bad guide beyond it. Unfortunately, we are not good at setting these boundaries! Look here for a more elaborate discussion on the value and limits of intuition in decision process.

Business Strategy and decision

Strategy is not about applying some srules or principles geared for success. As described by McKinsey here, such rules are most often built on dubious post-facts research based on so called halo effect (conditions of success that affected a whole industry business environment), and most often fail to reflect the fact that any business decision process is largely based on ambiguous data: we most often have to decide when the traffic light is on the yellow, not on green or red.