Saturday, February 10, 2007
"Faith-Based" in Decision Making
I believe that a thorough, rational and dispassionate analysis cannot lead us to any 'visionary' conclusions. I believe the world is messy, fluid and unpredictible. Today there is a proliferation of data and data-processing tools in the world and hence it is much more easy to analyse data today than in the last generation. Despite this, i hold the view that data data analysis can only achieve so-much. Too much of analysis leads to analysis-paralysis and at the end of the day a decision is driven by a 'gut feeling'. Any large-enough decision is and continue to be 'faith-based'.
Why ? This is because data and analysis treats the world as 'deterministic'. This means that given enough tools and techniques, mathematics is capable of figuring out the Great Equation which governs a given reality. Tools today are capable of factoring out data-noise, outliers and externalities. And decisions taken on such data-driven approaches are deemed as 'rational'. However, the philosophical underpinings of such an approach may be flawed. Why ?
Why ? This is because data and analysis treats the world as 'deterministic'. This means that given enough tools and techniques, mathematics is capable of figuring out the Great Equation which governs a given reality. Tools today are capable of factoring out data-noise, outliers and externalities. And decisions taken on such data-driven approaches are deemed as 'rational'. However, the philosophical underpinings of such an approach may be flawed. Why ?
- Are we sure that the future be predicted based on the past ? The philosophical question realated to this is called the 'Determinism ve 'Free-Will' problem. This is one of the most important philosophical questions. Are the workings of the world pre-detemined based on the past ? Or does man have a free-will - not constrained by the past and able to take decisions freely. Not as a logical robotic outcome of the past ?
- Even if this is true, can we even hope to make even a general approximation given the randomness in reality ? Even if, for a moment, we assume that the world is deterministic and there is that one "Great Equation" that governs all reality, we run into some practical problems. Driven by the complexity of the problem itself. Take Chaos Theory - which at its very core postulates - "A small random change in the input variable leads to a more-than disproportionate change in the outcome". The most common analogy of this has become the 'fluttering butterfly' story i.e. that elements determining weather are so complex that even a butterfly fluttering its wings leads to a tropical storm half-way accross the globe. So even if we nail down the 'one great' equation, it is well-neigh impossible to predict the future with any degree of accuracy.
So, we are at the end of the day, large decisions are basically 'faith-based'. This is true for a wide range of decisions :- like investments in emerging markets, or even a decision like to get married to a particular person. Most Big-ticket investments in emerging markets are faith-based decisions - In the indian context, say the decision to invest in Oil exploration/retail by Reliance, or the recent investment of the Tatas in Corus are examples of faith-based decisions.
Here my contention is that the MBA-educated professional is incapable of recommending faith-based investment decisions. The professional manager will data-crunch and in new and emerging industries since there is lack of data, there is not much to go by. Hence the professional manaager will recommmend only incremental, cagey investments.The reason is that since he will be called upon to explain the rationale of the decision, he can only recommend what is based on data and he cannot explain 'faith'.
The enterprenuer on the other hand looks at the data, but at the end of the day makes a faith-based decision. Of course, this goes wrong too sometimes (like the unrelated diversification of Indian conglomerates spent on 3G or Satellite phones). In this case, the risks are also bourne by the enterprenur. However, in most instances, professional manager is not willing to bet his career on a 'gut-feel-faith'.
The same goes for even personal decisions like marriage or having a child. There are often equal reasons not to marry somebody/have a child as there are reasons to...Too much of analysis will lead to nowhere. One is not recommending, of course, that all decisions be faith-based. (there is a danger in that too). However once the data has been crunched, pros and cons weighed, the final decision may be faith based.
Often people make the mistake of mulling over the data too much. One needs to be aware of what is the point of bounded rationality beyond which decision making is necessarily not driven by data.
