Decision Making, Tolerance to Ambiguity and Regret Theory

“Neurosis is the inability to tolerate ambiguity.”

-Sigmund Freud

Colin Shaw is expert on subject of customer experience. In today’s world to manage customer’s experience you have to be agile, innovative and able to deal with ambiguity as there may not be a readymade solution.  Kano Model shows that what delights a customer today may become basic need tomorrow- ask manufacturers of mobile phones.

Change is the only certainty in this world today and the pace of change is ever increasing. We all know that change isn’t easy. Every day that passes we need to deal with an increasing amount of ambiguity. Ambiguity creates complexity and means decision making is difficult. Ambiguity creates uncertainty and stress. However, to be successful in business today you need to be good at dealing with ambiguity.

– Colin Shaw

 

To deal with ambiguity you need decision making skills. There are statistical models which help you in decision making. There is lot of literature available on this. Here well will deal with some aspects of decision making.

There are 3 models of decision making under uncertainty- Maximax, Maximin and Minimax. For last model- Minimax ,  we also need understanding of Regret Theory.

Regret theory says that people anticipate regret if they make a wrong choice, and take this anticipation into consideration when making decisions. Fear of regret can play a large role in dissuading or motivating someone to do something.

If you are an optimist then you will usually go for Maximax .The maximax looks at the best that could happen under each action and then chooses the action with the largest value. It assumes that a person will get the most possible and then take the action with the best case scenario.

If you are a pessimist then you will go for Maximin. The maximin person looks at the worst that could happen under each action and then choose the action with the largest payoff. They assume that the worst that can happen will, and then they take the action with the best worst case scenario.

If you are opportunist and believe in regret theory, then you will go for Minimax . Minimax decision making is based on opportunistic loss. Opportunist looks back after the state of nature has occurred and says “Now that I know what happened, if I had only picked this other action instead of the one I actually did, I could have done better”. So for decision making (before the event occurs), he creates an opportunistic loss (or regret) table. Then he takes the minimum of the maximum.

Ex. if you were given an option to decide how much money you can invest in project, you construct a table with amount you would like to invest in different scenarios.

 

 

In given table an optimist will first look at best scenario table and look for highest profit i.e. invest Rs.4000, as he can earn Rs.400 in best scenario. Pessimist will first look at worst scenario table and then look for minimum loss i.e. invests Rs.1000, so that in worst case he will end up losing at the most Rs. 50.

An opportunist will construct a regret table i.e. how much amount he had to forego (opportunity loss) by taking a particular decision. He will then look at each row and highlight the maximum amount in each row. He will then chose one with minimum loss i.e. invest Rs. 3000 as opportunity loss here is least i.e. Rs.100.