A decision consists in selecting one course of action among several based on its merits. A first step in any decision-making process is therefore to formulate a problem, i.e. to define objectives and design the options among which we have to choose to achieve them. I use the terms “formulate”, “define”, and “design”, rather than “identify” or “select”, because in practice, problems and solutions do not exist “out there”. They are not given and one of the most important executive functions is to shape our choices. This is a critical step because it determines what is relevant and simplifies the problem to make it tractable.
Once decision alternatives are defined, costs and benefits which are relevant to the decision at hand must be identified and gathered. I will come back to the notion of relevance later. For now, I need to stress that a very important rule governing the decision-making process is to purposefully ignore available but irrelevant information, and look for unavailable but relevant information.
Once information about all relevant costs and benefits has been gathered, it is possible to compute the net economic impact of the decision. Since differences in costs and benefits may be more or less easy to enact and therefore are more or less likely, some approaches weigh these impacts by their probability to compute an expected net economic impact.
There are however other ways to account for the uncertainty in the assumptions, forecasts, and estimates upon which the net economic impact relies. The computation of indifference points and sensitivity analyses help assessing how sensitive the estimated net economic impact is to variations in underlying parameters.
A greater positive net economic impact (i.e. an increase in profit compared to the status quo) is a priori an argument in favor of a decision alternative, and a negative net economic impact is an argument against. But keep in mind that this is only one of the arguments. It is also crucial to take into account qualitative factors like the strategic coherence, operating risks, or corporate social responsibility.
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