The Risk Muscle

An organized retail chain into fresh food retailing recently decided to rollback its expansion plan in few states after aggravated agitation against it by the local vegetable vendors. The business leaders face complex decision making situations too often. When you make right decision no one remembers but when you make a wrong one no one forgets. The saying goes like - don't limit yourself to few alternatives but open your mind to different view points. I want all decision makers to look at different paradigms through this interactive case study.

Assume that you are a farmer and you need to plant one crop over all your land. You have a choice of three kinds of seeds. There will be three possible weather conditions, say good, average, and poor. It is impossible to predict which condition will realize, since each is equally likely to happen. The Profit & Loss for the possible weather conditions are summarized in the following matrix.

Which crop would you plant? Why?

There is no correct or incorrect answer as all options have same probable outcome i.e. 6. All depends on your risk muscle. The buzzword used many times is Risk Appetite but I would like to use the word Risk Muscle.

When you have confronted with a yes-or-no decision or a this-or-that decision take out a coin, assign one alternative to heads, the other to tails, and flip the coin. Look at the coin for the result and immediately ask yourself how you felt. Albert Einstein had suggested this method saying it is useful to incorporate your feeling into your decision making. Only after a choice is made, the risk assessment becomes meaningful.

The business managers are trained to make knowledgeable decisions based on factual and experimental analysis and observations. To validate assumptions, informed enquiries are also made. The biggest of assumptions is more the facts available, better the decision making. In reality the business managers often face Dharam Sankat situation in Decision Making.

Suppose you are a doctor working in an Indian Village, and 600 people have come down with deadly dengue fever. Two possible treatments exist. If you choose treatment A, you will save exactly 200 people. If you choose treatment B, there are 1/3 chances that you will save all 600, and a 2/3 chance that you will save none. Which treatment do you choose?

The majority choose option A.

Imagine again that 600 people have come down with deadly dengue fever. Two possible treatments exist. If you choose treatment C, exactly 400 people will die. If you choose treatment D, there is a 1/3 chance that no one will die, and a 2/3 chance that everyone will die. Which treatment do you choose?

Now the majority choose option D.

Now suppose one of your close friends is suffering from a life threatening disease. When your friend is unconscious, the doctors seek your choice between the available two treatments as you are the only one available at that moment. Treatment P which has 100 % success rate but a side-effect that your friend will lose his eyesight and Treatment Q which has only 20 % success rate. Think about your choice first and then think how your friend would have decided if he were to make the choice. Then, think about his close relatives' possible choice and effect of outcome of your decision on them and your friend.

A timely decision is far superior to a perfect decision that is late. Over optimism can kill whereas keeping near to reality helps.

When you are in a leadership position, you have to consider view points of all the stakeholders and effect of your choice on your environment. Remember prospect of loosing is more profound than the satisfaction of winning. It is not difficult to forgo what is not yours at present but it is difficult to forgo what is yours at present. Remember the funny incident from a bollywood movie where a miser pays off his debt in cash to the person owing in front of dacoits. :)

The point I am making will be more clear from the following anecdote. Perhaps apocryphal, about the man who approached Coca-Cola when the company was in the business of manufacturing Coca-Cola syrup. He took two years before the business leaders at Coca-Cola spared their two minutes to listen to his idea which he gave in just two words: 'Bottle It', the rest is history. It may not be procrastination but surely risk aversion of the decision makers to forgo their valuable two minutes (their current ownership) to listen to the future business idea (their future ownership).

Please provide with your valuable comments.