To improve decision quality (DQ), a rigorous approach is required in several areas:
- Generate more options! Often, only one or two “first ideas” are considered – the “choice fallacy”. To generate additional options it is generally necessary to have a robust and facilitated process, and also to involve a wide set of participants with differing views.
- Include risks and uncertainties within the economic analysis! Risk and uncertainty assessment are not something to simply ignore or leave to a risk management team. Their inclusion in the decision-making process is a necessity! Where multiple uncertainties are present, their potential simultaneous impact needs to be fully considered in the decision and its economic analysis; they affect base economics as well as the target setting, chance of success and the risk governance process.
- Correct for biases. Whilst “gut feel” will have an important role in many decisions, it should be used only where truly necessary, and not simply as a substitute for poor or incomplete analysis. The use of risk and uncertainty modelling can overcome structural biases that are inherent in regular financial modelling (such as the “fallacy of the most likely”). It should also expose motivational biases – by using a transparent process to separate base case assumptions from the true range of possible values.
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READ BLOG: THE ROLE OF RISK ASSESSMENT IN DQ
FINANCIAL MODELLING OVERVIEW
RISK MODELLING AND SIMULATION OVERVIEW
DECISION SUPPORT AND VALUATION OVERVIEW
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