An old name for Business Intelligence used to be “Decision Support Systems”. This put me thinking: as IM practitioners we should consider going beyond classical  ”decision theory” and examine modern developments in fields such as behavioral economics.

What do I mean by this ? Well classical decisions theory presupposes the “rational actor” who will engage in analytical reasoning and come up with the best course of action. However Nobel-prize winning research by Daniel Kahneman amongst others has clearly demonstrated that even the smartest of us rely on intuitive shortcuts known as cognitive or heuristic biases. For example Harry Markowitz, the Nobel laureate who is the father of modern investment portfolio theory famously engaged in the naïve diversification heuristic when choosing the weighting of his own pension portfolio:

In short US academics all subscribe to a pretty standard pension plan, the choice is how much you split between bonds & equity. Obviously bonds have a lower short term risk, but also a lower long term yield…. so a young person might well pick 90 % Equity 10% Bonds and as they come closer to retirement age the ratio would converge or even cross over. However instead of engaging in such rational analysis … Harry just did a rule of thumb split and went for 50/50 … i.e. the naïve diversification heuristic !

When asked about how he allocated his retirement investments in his TIAA-CREF account, Nobel laureate Harry Markowitz, one of the founders of modern portfolio theory, con- fessed: “I should have computed the historic covariances of the asset classes and drawn an efficient frontier. Instead, . . . I split my contributions fifty?fifty between bonds and equities”

Now if people that smart & knowledgeable make bad decisions in comfortable environments… what hope for the pressured business executive ?

However hope is at hand as people can learn how they think and become better at critical thinking

We as practitioners need to consider these factors when designing “decision support systems” and we need to step back and think about how to help clients make the right decisions.  I will post more on this topic soon.

Many organizations, both large and small, rely on enterprise application software (EAS) to facilitate their day-to-day business operations.  When it comes to implementing EAS, programming specialists are often torn between customizing the application to their organization’s business process vs. using the standard, “canned” process provided by the application vendor.  Both have their benefits: Typically, canned processes are easier and less costly to implement, whereas customized processes are more complex and resource-reliant (yet provide more efficient and streamlined operations).  The decision to customize or not is often based on the resources and technical “know-how” of the firm, and often leads to poor application implementations that do not meet the needs of the business as a whole. 

How would you advise business managers to deal with EAS customization decisions when cost and resources are a factor?