If In Doubt: Do Something (Consciously) (16 August 2003)

We all look for certainty. While we live in uncertain times with uncertain futures we wish it were not so. However, living with risk and uncertainty is something that has always been a fact of life. What excites us is the ability to determine and predict our future, and perhaps even have a role in its co-creation.

Historically, we have always enjoyed taking a risk, leaving our fate to luck, or the gods. The ancient Egyptians threw knuckle-bones in games of chance. In Greek myth, the gods rolled dice for the universe, Zeus winning the heavens, Poseidon the seas and Hades being left with the underworld. In ancient times, your fate was not a matter conscious choice and the future was out of your control. Has this changed, and if so when did this occur? Author, economist and historian Peter Bernstein argues that the rise of modern mathematics may mark a turning point, a shift in human culture, at which time we discovered how to manage risk and make our own future (1.). He suggests that probability theory is what enabled us to move from being at the mercy of the gods to a rational approach to decision making theory, by the ability to rely on calculated and assessed risk.

Decision-making theory is described as the 'way we decide what to do when it is uncertain what will happen' (2.). Blaise Pascal (1623-1662) is credited with its creation. Pascal was the son of a mathematician and a child prodigy. As a teenager he invented a calculating machine using gears and levers to assist his father's work. In his adult life he moved periodically between the extremes of profound religious devotion and dissolute indulgence at the gambling tables of Paris. This probably led to Pascal introducing a moral dimension into mathematics and game theory, often working on questions that arose through his fascination with gambling. This is highlighted in a probability model called Pascal's Wager, part of his unique contribution to the way we think about risk and decision making.

Pascal's Wager works in this way. As Pascal could not prove the existence or absence of God mathematically, he described his belief about the existence of God in terms of a game of chance. He argued that it is not possible for us to choose to ignore the issue, as we are already in the game - the mere act of living being our consent to play. So Pascal created a risk-reward analysis of either believing in God, or choosing not to (a central theme of his life) to resolve his question.

To do this Pascal proposed a four-quadrant decision making model. In his wager the risk was eternal damnation and the reward was eternal salvation. The stake Pascal put up was his determination to live a religious and pious life or instead an indulged and dissolute life. To him they were a matter of even choice (50:50).

In Pascal's analysis the four choices available to him and their consequences were:

Q1. Live a pious life and God exists, resulting in the reward of eternal salvation (1:100).

Q2. Live a dissolute life and God exists resulting in eternal damnation (1:-100).

Q3. Live a pious life and God doesn't exist resulting in no loss on his investment (1:1).

Q4. Live a dissolute life and God doesn't exist, resulting in an even payout, but a very different life (1:1).

Q1: Salvation GOD Exists Low Risk - High Reward	Q2: Damnation GOD Exists High Risk - Unsure Reward
Q3: Moral Life GOD Doesn't Exist Low Risk- No Reward	Q4: Immoral Life GOD Doesn't Exist High Risk - No Reward

Pascal, being a believer in mathematics but uncertain about God, then had a way of making his decision. The model showed that only one of the choices presented a low risk/high return option for Pascal - a belief in God and a pious life. The risk return analysis (damnation or salvation) for the same wager (his choice of a life well lived) left him with a clear path and he retired to a monastery to write more books thereby benefiting literature and science. While there are acknowledged problems with a wider application of Pascal's inputs into his model (i.e. there are other religions, indicating multiple options), the model and the theory behind it represents sound decision making.

In resolving his personal dilemma, Pascal also helped strategic management and our ability to make conscious decisions about an uncertain future. Like Pascal, organizations live with various unknowns. They are, however, required to play the game they are in. Using a modified version of Pascal's wager four options are open to us through the discipline of strategic analysis. These are:

1. Do Something,

2. Do Nothing,

3. Do Something Consciously or

4. Do Nothing Consciously.

A Strategic Wager analysis looks like this:

Q1: Do Something (Conscious Action) Low Risk - High Reward	Q2: Do Anything (Its all Good) High Risk - Uncertain Reward
Q3: Do Nothing (Conscious Inaction) Low Risk- No Reward	Q4: Do Nothing (Who Cares) High Risk - No Reward

In applying the Strategic Wager model, it is only the Quadrant 1 decisions: Doing Something Consciously - that provides both low risk and high rewards. The other options rely, either on fate and good luck for success, or lead to us consciously doing nothing.

When the question is put this clearly, we can see why there is a potential shift in the standards required of the directors and officers of organizations. Avoiding a decision is really just the abdication of decision-making responsibility, as might also be a consecutive series of decisions to Do Nothing. By Doing Nothing, even consciously, we limit our exposure to new opportunities, which in turn would have created further options. This significantly limits future growth potential. If Boards are not consciously applying their thinking to their key strategic management questions, this could in the future be seen as negligence.

Where this will impact most is for organizations in declining markets. The future is certain, only the timeframe is unknown. Again, strategic management theory can help by using two models. Levitt's traditional product life cycle analysis shows the changes in such markets as four phases: (3.)

1. Introduction of the Product (slow growth)
2. Growth (exponential increase)
3. Maturity (plateau)
4. Decline (exponential decrease)

Understanding the product lifecycle is useful when we realize that different strategies are needed in the different phases. However, when we apply Levitt's model, although it may show us the past, it does not necessarily predict the future. When we are in the life-cycle, we can not know exactly where we are in relation to the 'peak' of the cycle.

A decision making tool that assists organizations faced with this dilemma is the FEFIFO™ Model (4.). It structures an analysis of twelve aspects of the decision. The mnemonic stands for the three resulting options. Knowing your options at the point of choice helps. The first option: 'Find Exit' - is selected when the organization's efficiencies of scale cannot match the declining market revenues. It is time to leave. The second option: 'Fit In' - is chosen where there still remains opportunities in sharing the market with the established competition, matching each innovation as it emerges. The third option: 'Full On" - is where the organization knows it can find a sustainable competitive advantage and become the market leader, either in the current product market which has not yet peaked, or in the new market that emerges from it. So really the three options are to: - lead (Invest), follow (Optimize), or get out of the way (Divest). Using the tool correctly provides a clear path to a sound decision.

There is of course a fourth option and that is to do nothing, to make no decision and just to wait. To delay a decision until more facts are known is a valid approach. But at some point a decision is required. The wonderful irony is that a decision not to decide is often equivalent to a decision to 'decide not to'. Opportunities pass by, events change, and the future comes on regardless like waves upon the shore. Time and tide wait for no-one. By doing nothing, the future will be decided for you.

So sometimes, we must do something. However, a conscious decision to 'Do Something' is not just a decision to do anything. A strategic decision is one made from a number of equally possible options. Do Anything - and we learn that there is only one thing more dangerous than a good idea - which is when it is your only idea. The test of a conscious and strategic decision is, when asked to explain how the decision relates to 'purpose', you are given reasons - not rationalizations (with managed risks). Knowing the difference is of profound significance to your future.

Making decisions at critical turning points is never easy. The next step may not always be clear, but often we must take one anyway. The solution to this inherent dilemma of risk and reward - is to decide, working with the greatest clarity and conviction the inherent uncertainty of the future will allow: consciously, prudently and intentionally. In the words of Aristotle: "What it lies in our power to do, it lies in our power not to do." The first step is to do the thinking needed to acquire this power and through this comes our ability to choose our future.

William Varey, Executive Director,
Forsyth Consulting Group
www.fcg.com.au

1. Bernstein, P. (1996) Against the Gods: The remarkable story of risk, John Wiley and Sons, New York

2. Hacking, I (1975) The Emergence of Probability: A philosophical study of early ideas about probability, induction and statistical inference, Cambridge University Press, London.

3. Levitt, T (1965) "Exploit the Product Lifecycle", Harvard Business Review, Nov-Dec 1965 pp81-94.

4. The Strategic Wager and FEFIFO™ Models are customized frameworks developed by Forsyth Consulting Group for ®.

 

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