How to make bounded decisions on risk

06/11/2010 — Leave a comment

Holed beneath the waterline (Source: Claus Bergen)

Holed beneath the waterline

A key concept of current theories on decision making is that of bounded rationality. In essence we (humans) try to act rationally but are constrained by the limits of both time to make a decision and the information available (1). So if we make decisions in this way what are some useful, ‘tools of the trade’ that can guide our decision making? For risk based decisions I’ve found that a key technique is to ask oneself what is the worst case downside to the decision. A decision that won’t hole you below the waterline (2) is one that you can spend less time on and perhaps accept more uncertainty. A potentially catastrophic people, mission, business or reputation killer obviously requires more attention and less uncertainty in the decision.

Notes

1. Making epistemically uncertainty an inherent element of bounded decision making.

2. In naval parlance a shot that hits above the waterline will do damage but you’ll probably survive, one that hits below puts the whole ship in peril. Worse yet the flooding may be so fast you’ve no time to respond. So major damage below the waterline is to be feared above all else.

3. Yes, I am a former naval officer. 🙂

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