I’ve been listening to an interview with Tom Davenport from the recent The Premier Business Leadership Series in Las Vegas, and he raised an interesting point regarding the role decision models played in the recent meltdown in the financial sectors.

Models provide a bridge between large volumes of complex data, and the judgment of executives who make major decisions based on the data. Many have been blaming the models for the bad decisions that led to the collapse.

Tom Davenport pointed out that the models weren’t always at fault. He instead believes that the problem was the disconnect between the executives using the models, and the underlying model assumptions. He states “analysts need to be much more transparent about the assumptions behind the models…[and] if they’re not providing that, [executives] need to really push back…”

The message here is that models are only as good as the assumptions that they’re based on, and assumptions should be scrutinized as closely as the outputs. Ask questions, challenge how these bridges are built, and balance it all with your own good intuition for a better and more profitable decision-making process.

This entry was posted on Thursday, November 26th, 2009 at 10:40 am and is filed under Bad Decisions, Blog, Decision Models. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.