Wednesday, April 22, 2015

What specifically must we know in order to make a good decision?

"What specifically must we know in order to make a good decision?"
Perhaps one of the simplest yet profound questions posed in the article Bringing Science to the Art of Strategy, this simple concept is my key take away. By asking myself this question in the development of my own business strategies I believe I can greatly improve my odds for success.  In fact, the 7 steps of the possibilities-based approach are fundamentally anchored to the scientific method and, as such, are universally applicable to all manner of decisions.

I could apply the possibilities-based approach to the issue of saving a down payment for my family’s first home purchase.  Through a little research, it’s easy to identify the price range for the home I’d like to purchase. Armed with that information, I would calculate the amount needed for the down payment of 20% (to avoid PMI insurance).  If the home I want to purchase is $500k, this would require a down payment of $100k.  Knowing that my wife and I plan to grow our family in the next few years I would set myself a deadline of 5 years to save the down payment. 

I would begin my possibilities –based approach by framing the issue into two mutually exclusive options: staying the course with my current employer; or, finding another source of employment. Luckily, these this choice translates easily into two possibilities: (1) I could stay in my current role; or, (2) I could find employment with another company. Next, I would decide what conditions needed to be met in order for me to succeed in each of the strategies. 

For either strategy to be sound I would need to ensure that I could save a minimum of $20K a year for five years.  In my current role this might prove difficult.  Let’s assume that our current household budget only allows us to save $5k annually.  This means that I would need to increase our annual savings rate by by 300% in order to be successful!  While we may be able to reduce our expenses, that might only contribute an additional $2k to our annual savings.  This would still leave a deficit of $13k.  Assuming an annual salary of $130k I would need to achieve an annual bonus of at least 10 % of my salary in order to make up the difference.  For strategy 2 to be successful I would need to find another job making at least 10% more annually to meet our savings goal.  In addition, the job would have to be enjoyable and that can be difficult to assess.

Taking each of these three conditions as a barrier, I would devise tests to validate whether the conditions would hold true in practice. To test the status quo I would have a frank conversation with my supervisor about my financial and careers goals and solicit her feedback on (a) whether the goals are attainable in my current role and (b) what specific performance targets I would have to hit in order to achieve the bonus I sought.  To test the second condition I would apply to different jobs to see what sort of offers I received.  Given that I receive an offer high enough to enable my savings goal, there is still the question of whether or not I would enjoy the job. No matter how many questions you ask in an interview you never can know for sure whether you will like working somewhere until you’ve worked there for a while.  However, by applying the possibilities-based approach in choosing my savings strategy I would at least be leveraging proven science to inform my choice.

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