Making Choices in the Absence of Information

Making Choices with Scant InformationDecision making in the presence of uncertainty is a normal business function as well as a normal technical development process. The world is full of uncertainty.

Those seeking certainty will be woefully disappointed. Those conjecturing that decisions can't be made in the presence of uncertainty are woefully misinformed. 

Along with all this woefulness is the boneheaded notion that estimating is guessing, and that decisions can actually be made in the presence of uncertainty in the absence of estimating.

Here's why. When we are faced with a decision, a choice between multiple decisions, a choice between multiple outcomes, each is probabilistic. If it were not - that is we have 100% visibility into the consequences of our decision, the cost involved in making that decision, the cost impact or benefit impact from that decision - it's no longer a decision. It's a choice to pick between several options based on something other than time, money, or benefit.

We're at the farmers market every Saturday morning. Apples are in season. Honey Crisp are my favorite. Local growers all know each other and price their apples pretty much the same. What they don't sell on Saturday, they take to private grocers. What doesn't go there, goes to the chains and labeled Locally Grown. Each step in the supply chain has a mark up, so buying at the Farmers Market is the lowest price. So deciding which apples to buy is usually an impulse for me and my wife. The cost is the same, the benefit is the same, it's just an impulse.

Let's look at the broad issue here - not about apples, from Valuation of Software Initiatives Under UncertaintyHakan Erdogmus, John Favaro, and Michael Halling, (Erdogmus is well known for his work in Real Options).

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Buying an ERP system, or funding the development of a new product, or funding the consolidation of the data center in another city is a much different choice process than picking apples. These decisions have uncertainty. Uncertainty of the cost. Uncertainty of the benefits, revenue, savings, increasing in reliability and maintainability. Uncertainty in almost every variable. 

Managing in the presence of uncertainty and the resulting risk, is called business management. It's also called how adults manage projects (Tim Lister)

So with the uncertainty conditions established for our project work, how can we make decisions in the presence of the uncertainties of cost, schedule, resource utilization, delivered capabilities, and all the other attributes and all the ...ilities of the inputs and outcomes of our work?

The Presence of Uncertainty is one of most Significant Characteristics of Project Work

Managing in the presence of uncertainty is unavoidable. Ignoring this uncertainty is also unavoidable. It's still there even if you ignore it.

Uncertainty comes in many forms

  • Statistical uncertainty - Aleatory uncertainty, only margin can address this uncertainty.
  • Subjective judgement - bias, anchoring, and adjustment.
  • Systematic error - lack of understanding of the reference model.
  • Incomplete knowledge - Epistemic Uncertainty, this lack of knowledge can be improved with effort.
  • Temporal variation - instability in the observed and measured system.
  • Inherent stochasticity - instability between and within collaborative system elements

Agile is an Approach to Dealing With Software Project Uncertainty

Going on 12 years ago the topic of managing in the presence of uncertainty was an important topic that spawned approaches to ERP using agile. This work has progressed to more formal principles and practices around software development in the presence of uncertainty and the acquisition of software products.

So Back To the Problem at Hand
If decisions - credible decisions - are to be made in the presence of uncertainty, then some how we need information to address the sources of that uncertainty in the bulleted list above.
This information can be obtained through many means. Modeling, sampling, parametrically, past performance, reference classes. Each of these sources has in itself an inherent uncertainty. 
So in the end, it comes done to this...
To make a credible decision in the presence of uncertainty, we need to estimate the factors that go into that decision.
We Need To Estimate
There's no way out of it. We can't make a credible decision of any importance without an estimate of the impact of that decision, the cost incurred from making that decision, the potential benefits from that decision, the opportunity cost of NOT selecting an outcome from a decision.
Picking one Honey Crisp basket over another, not much at risk, low cost, low probability of disappointment. Planning, funding, managing, deploying, operating an ERP system, not likley done in the absence of estimating all variables up front, every time we produce the next increment, every time we have new information, every time we need to make a decision.
To suggest otherwise violates the core principles of Microeconomics. If it's your money no one cares - apples or ERP, proceed at your own risk, ignore microeconomics.
If it's not your money, it's going to require intentional ignorance of the core principles of successful business management. Behave appropriately.
 

Feed Author: 

Glen B. Alleman

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