Smart Choices. Howard Raiffa
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but beyond them lie sometimes sobering, sometimes exciting consequences. Abandoning the corporate treadmill for your own sailboat chartering outfit in Aruba may sound enticing, but what would be the consequences for your spouse’s career, your school-age children, your aging parents, your cancer-prone skin? Assessing frankly the consequences of each alternative will help you to identify those that best meet your objectives—all your objectives.
Grapple with your tradeoffs. Because objectives frequently conflict with one another, you’ll need to strike a balance. Some of this must sometimes be sacrificed in favor of some of that. Your career is important to you, but so is your family. You may decide, therefore, to reduce your business travel or even to cut back on your hours at the office. You’ll lose some career momentum and possibly some income, but you’ll gain time with your spouse and your kids. In most complex decisions, there is no one perfect alternative. Different alternatives fulfill different constellations of objectives. Your task is to choose intelligently among the less-thanperfect possibilities. To do so, you need to set priorities by openly addressing the need for tradeoffs among competing objectives.
Clarify your uncertainties. What could happen in the future, and how likely is it that it will? To decide how much money to set aside for your daughter’s college education fund, you must assess a number of uncertainties. Will she apply to an Ivy League university or a state college? Will she be accepted? Are her academic, artistic, or athletic skills likely to earn her a scholarship? Will she want to work while studying? Will she need a car? Uncertainty makes choosing far more difficult. But effective decision making demands that you confront uncertainty, judging the likelihood of different outcomes and assessing their possible impacts.
Think hard about your risk tolerance. When decisions involve uncertainties, the desired consequence may not be the one that actually results. A much-deliberated bone marrow transplant may or may not halt cancer. A low-risk investment in municipal bonds could result in major financial losses. People vary in their tolerance of such risks and, depending on the stakes involved, in the risk they will accept from one decision to the next. A conscious awareness of your willingness to accept risk will make your decision-making process smoother and more effective. It will help you to choose an alternative with the right level of risk for you.
Consider linked decisions. What you decide today could influence your choices tomorrow, and your goals for tomorrow should influence your choices today. Thus many important decisions are linked over time. A highway commissioner may decide to buy land now to create options for accommodating possible increases in traffic in the future. He thus circumvents potential jumps in land values or increases in community resistance which could foreclose future options. The key to dealing effectively with linked decisions is to isolate and resolve near-term issues while gathering the information needed to resolve those that will arise later. By sequencing your actions to fully exploit what you learn along the way, you will be doing your best, despite an uncertain world, to make smarter choices.
The eight PrOACT elements provide a framework that can profoundly redirect your decision making, enriching your possibilities and increasing your chances of finding a satisfying solution. Before discussing each element in the coming chapters, we’ll begin here with a brief and somewhat simplified case study that shows the PrOACT process at work.
APPLICATION
To Sell a Business or Not?
Many years ago, an acquaintance of ours who we’ll call Bill established a soundproofing business in Brooklyn, New York, with his friend Stan. It had the usual rocky start faced by most new businesses – getting it established required a lot of hard work – but after 20 tough years Bill and his partner were at last happy with where their company stood. It had grown; it was successful; and their key employees were skilled, loyal, and reliable. The unremitting stresses and strains of owning a small business had eased.
Bill, an active and restless man who liked challenge and change, now worried about becoming complacent and losing his edge. Taking a proactive look at his situation, he began to evaluate his needs and concluded that he wanted to sell his half of the company. He thought he might go on to launch a new business of some kind. He shared his thoughts with Stan, and Stan indicated a willingness to buy Bill out.
Then Bill started thinking about how to price his share of the business. He knew that the company was worth $1,300,000, giving his half a value of $650,000. But he felt that was much more than Stan could afford. He decided, tentatively, to set the price at $400,000. When he talked over his intentions with his wife, Marie, and their three grown children, however, they expressed considerable discomfort with the course he was considering. They remembered vividly, even if Bill himself didn’t, the grueling toll taken by the long hours and high stress of the early years spent establishing and building the company. Was he really ready to go through that again at age 57? And if he did sell, shouldn’t he get the full rewards of his labor—shouldn’t Stan have to pay the real price? As Bill listened to their arguments, he realized that he, too, was uncomfortable with the decision he was about to make. He sought our advice.
Our first priority was to help Bill formulate his decision problem clearly. Why sell? He was bored; he wanted a change. He planned, somewhat vaguely, to develop another business, location and type undecided. He also planned, again vaguely, to look into moving to the West Coast—the climate appealed to him, and he and Marie would have more opportunities to golf, sail, fish, ski, and pursue the other outdoor activities they loved.
Bill needed to give direction to his decision problem by assessing his objectives explicitly. How much did he really want the invigoration of a new physical environment and way of life? the intellectual challenge of gaining expertise in a new area? the mental and emotional effort of building a business from the ground up? With more focus and thought, Bill defined his primary objectives: participating in outdoor recreational activities, being challenged intellectually, and minimizing stress. He clearly valued loyalty to his partner as well, because he was willing to sacrifice to him a significant portion of his business equity.
We began next to look at alternatives. Bill had ruled out the status quo, but he had considered only one other option: selling out to his partner for $400,000. But even given his determination to sell, a higher price would better enable him to fulfill his objectives—he shouldn’t overlook that alternative. In addition, we helped Bill develop some other, more creative choices. He could get $650,000 by finding a buyer other than his partner. Or his partner could pay $400,000 immediately and $250,000 in installments over time. Or Bill and Stan could both sell, with Stan, if he wished, remaining to manage the business under the new ownership.
Bill’s new insight into his objectives led him to reflect more deeply on the consequences of this expanded, but still-limited range of alternatives. Had he considered the bite that capital gains taxes would take out of his investment capital? Would the remaining sum give him the flexibility to start over while maintaining the degree of leisure and comfort that he and Marie had come to enjoy? The financial picture for a sellout, given the tax situation, didn’t look as attractive as it once had.
We pressed Bill to consider the tradeoffs between his own financial well-being and his loyalty to his partner. We asked if, magically, his partner were somehow to come up with $650,000 to buy the business, would Bill turn around and write his partner a check for $250,000? He responded, naturally, with a resounding ‘‘No!’’
We also helped Bill think through the other tradeoffs inherent in his objectives. He wanted to enjoy outdoor life in a milder climate, but he wasn’t ready to retire. On the other hand, he didn’t want to go back to spending all his time working or worrying about work, either. He already had one grandchild, with another on the way, and he wanted to spend more time with them than he had been able to spend with their parents. Clearly, starting over with a new business would require significant personal sacrifices, not to mention the considerable risks and uncertainties of launching a new venture in a new market in a new place. Bill wasn’t afraid of uncertainty and risk—he was a businessman, after all—but this time around he wouldn’t be able to rely on Stan’s expertise and support. After an association of more than 20 years, he had come to value Stan’s perspective