Would You Know a Good Decision if You Saw One?

Abstract

Abstract Ever since the early publication by Grayson,1 we have seen an increasing interest in decision-analysis in the oil and gas industry. There have been numerous studies and publications discussing methods and models for rational decision-making. Given the inherent limitations of intuition and heuristics, one might expect decision-makers to be delighted with the more consistent approach provided by rational decision-making techniques. Modern decision models can help process large amounts of information without losing valuable pieces. They never suffer from distraction, fatigue, boredom or random error. They are consistent, week after week. Yet, in spite of these obvious advantages, people treat these with a nearly instinctive distaste. They are particularly resistant to the idea that simple models can validly make such subjective evaluations. For some, that resistance may stem simply from unfamiliarity with the statistics and probability involved. Many more, however, subscribe to the widespread assumption that human judgment is more discerning than a model. They are reluctant to believe that simple mathematical calculations can match the complexity of the human mind. "Take away an ordinary person's illusions," says Dr. Relling in Henrik Ibsen's Villanden, "and you take away happiness at the same time." A particularly interesting aspect of human judgment and decision-making are the traps we unknowingly step into. Many decision-makers believe that intuition, repeated experience and their general intelligence will see them through. Unfortunately, as will be discussed in the paper, intuition and repetition are unreliable teachers at best. Introduction Over the last decade, we have seen an increasing number of publications on decision-analysis making it into the exploration &production literature. We take this to be indicative of a realization that we, as an industry, need to improve our decision-making abilities in an increasingly uncertain and complex world and with a history of financial under-performance.2 Most of these publications discuss quantitative methods and models at either portfolio or asset/project level. They typically illustrate techniques such as Monte Carlo simulation, Markowitz efficient frontier optimization, decision trees, real option valuation and holistic asset modeling. Many of these publications present elegant mathematical models to help quantify uncertainty and risk and to illustrate how decision should be made. Unfortunately, many who have tried these elegant models find the real world so complex that the models are of limited use. An important contributor of the complexity in decision-making stems from the fact that human beings are imperfect information processors, we are not always rational. Personal insights about uncertainty and preference can be both limiting and misleading, even while the individual making the judgments may demonstrate an amazing overconfidence. An awareness of human limitations is critical in developing good decision-making procedures. To our knowledge, very little has been published in the exploration &production literature on the "cognitive"; i.e., the "thinking", social, judgmental and emotional aspects of decision-making. Even today, after decades of research on the psychological aspects of judgment and decision-making, people continue to assume that intuition, repeated experience and their general intelligence will see them through. Unfortunately, intuition and repetition are unreliable teachers at best. Research shows that the less competent people are, the less likely they are to know it. Overconfidence is a deeply rooted human characteristic. Not only do most people tend to hold overly favorable views of their intellectual and interpersonal abilities, but those who are the least accomplished overestimate their performance and ability the most. In other words, those who most need training to improve their decision-making abilities are the least likely to recognize it. Instead, like drunken drivers who are certain that their reflexes are unimpaired, they proceed with the mistaken impression they are doing just fine.