I recently came across a book written by Eduardo Porter: The Price of Everything: Solving the Mystery of Why We Pay What We Do. A couple of interesting excerpts:
* In 1984, Kenneth Feinberg negotiated a $180 million settlement paid by the manufacturers of Agent Orange to 250,000 Vietnam veterans who had been sickened by the chemical agent. He determined an average life was worth about $720 a head.
* In the months following September 11, 2001, US Congress approved a fund to compensate the victims of the terrorist attacks on New York City and the Pentagon. Feinberg was immediately faced with the challenge of putting a value on the tangible, and intangible, aspects of human existence. Although the fund paid $2 million, on average, to the next of kin to 2,880 victims who died in the attacks, each of the families of the eight victims who earned more than $4 million a year got $6.4 million, while the cheapest victim was valued at more than $250,000.
We have figured out a way to put a price tag on a life. When I read the book, it immediately reminded me of a time back in the early 1990s. I was instrumental in designing and developing a company course to teach managers how to make decisions. Our team created a highly structured and standard method centred around benefits, costs, Net Present Value, and risk. We called the course: Business Case Preparation. The executive management committee was happy as they felt it gave them some way of deciding between apples or oranges such as whether scarce monies should be spent upgrading computers, replacing an old facility, or hiring more employees.
Over the years, the model became more sophisticated as we attempted to monetize intangible costs and benefits associated with a “triple bottom line – financial, social, environmental”. Financial was relatively easy but Social and Environmental were not. If I recall correctly, I think we somehow determined the cost of a dead fish was $7. We also had costs for a personal injury but didn’t dollarize what a life was worth as Feinberg did.
Risk management proponents added another layer of complication to an already complicated model – identify the risks, determine the probability and severity levels for each the risk, and develop a risk mitigation strategy. Ways to manage risk continue to receive a lot of attention. How to Prepare for a Black Swan published by Booz & Company suggests running a disruptor analysis to test the capability to withstand high-magnitude, low-frequency catastrophes.
I now look back and confess how little did we know! Spend countless hours trying to predict future income and expenses. Identify everything that could go wrong. Plug the numbers into a spreadsheet to calculate another number. Then highest score wins. Next case please.
I believe I would be accurate in saying we were ignorant but not stupid. What we didn’t know is what we didn’t know. As a CE practitioner, I now realize that in many cases we were forcing a Complicated Domain solution to resolve a Complex Domain issue. Our “fail-safe” mindset led to a concerted effort to avoid failure and if it did occur, to have a recovery action plan in place.
We assumed (although we didn’t know enough to overtly state it) that people were rational thinkers. Dan Ariely is his 2008 book Predictably Irrational does a nice job demolishing the idea that people make decisions in a rational manner. The Heath Brothers in their book Switch wrote: “Psychologists have discovered that our minds are ruled by two different systems—the rational mind and the emotional mind—that compete for control. The rational mind wants a great beach body; the emotional mind wants that Oreo cookie. The rational mind wants to change something at work; the emotional mind loves the comfort of the existing routine.”
I particularly like the Knowledge@Warton review of Eduardo Porter’s book. It captures the essence of the Complex Domain:
* Economics must include human irrationality to be a more exact science, he argues, a paradox that lies at the heart of Porter’s book. It must incorporate social norms, the pursuit of what people think they want, and individuals who will pay an exorbitant price for a seemingly meaningless object just because it’s expensive.
* Including all these dimensions of humanity is likely to turn economics into a messier, less mathematically elegant discipline — an understatement for the ages — but, in exchange, the new economics will provide a more comprehensive understanding of the world.
* Also important, it will be able to grapple with the many ways in which the decisions we make based on the prices arrayed before us can take us in directions that, individually or as a society, we would rather avoid.
The next time a client asks for my help in preparing a business case, I think I’ll start the conversation in the Disorder Domain. From there, I’ll query the nature of the problem/opportunity and ask about the known knowns, known unknowns, unknown unknowns, and unknowables. That will be my first clue in determining if a Business Case methodology is the right solution or if it will be using a hammer to pound a screw.
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Front-line managers and supervisors practically spend their entire working day on the Ordered Side. I ...