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.
November 4th, 2009 at 11:00 am
Nice post Desmond, I have been banging on about this for years.
Two elements I’d like to comment on:
Firstly, BI is a an unfortunate piece of management/ vendor-speak. It obscures the value-based link to decision-making. The name Business Intelligence is an abstract noun defining (poorly) the whole information space (i.e. intelligence of and relating to the business, its staff, systems, clients and market context (nod to Hubert St Onge there) versus specific intelligence required to undertake action i.e. make a decision (Sveiby ‘knowledge = capacity to act’). Many BI projects fail because they treat all information as equal (although some fail for the opposite reason with EIS that fail to comprehend enough of the whole).
Second, I’m glad you raise (in more elegant terms) the myth of rational decision-making in organisations. Much that can be (and has been said about that) but it’s easy to imagine a logical process involving problem identificaton, researching all the possibilities and selecting the right one (to grossly simplify) but even typing it makes me laugh. I did write a short (unexciting) paper once on the role of satisfice in the organisation – a term coined by Adam Smith to describe (as I interpreted it at the time) as ‘not all the information required to make a decision but just enough’ http://www.thinkingshift.com/downloads/HowMuchKnowledgeIsEnough.pdf
November 5th, 2009 at 10:56 pm
I think that you have raised a very interest topic and there are many academic papers on this topic of executive decision making in relation to their cognitive biases. However irrespective on the individual biases which us consultants would have to overcome or be able to adjust, some of their biases like confirming biases might not be that easy to induce an alternate thought process.
Tools which could be used to frame questions for example could be used to potentially persuade executives of DSS to re-think their decisions. However many have tied and many have failed. Executives are an interesting bunch of people. Some of their decisions that they make might not even be based on the DSS itself but of their own biases.
I look forward in reading more in regards to your topic.
November 21st, 2009 at 5:42 am
[...] Thoughts on Decision Support Systems [...]
December 8th, 2009 at 6:26 am
@Briney001
. Also a god point on the fact the rationale for “Decision Support Systems” has been obscured.
Thank you for your comments and that paper proves useful also. I figured picking a smart Nobel Laureate – Harry Markowitz – was kinder and less controversial than picking a “mythical business manager”
Also in general in The West we re far too fond of the Rational Actor… he doesn’t exist … he is mythical ! And we need to explore our differences with him… in order to become more rational
@EJ
Indeed – and I intend to get to the more practical level with my next post in this topic (forecast for later this week !