In my last column Why You Can't Always Trust Your Gut, I said that instinct must be tempered with logic and insight in order to solve tough problems and promised to show you how you can do just that in the context of business: predicting success.
Predicting any outcome is tricky business, because the future is uncertain due to factors beyond our control. So what do you do when things aren't clear-cut, in addition to trusting your intuition? Estimate. Take an educated guess. Most of us forget how do that, though, so we end up basing a decision on personal experience and anecdotal information, which lands us right back in the "gut instinct" dilemma.
There's no magic to making logical, educated guesses. You just have to remember back to when you learned about probability in secondary school.
Probability is an elementary but powerful tool for problem solving and decision making. You calculate it with the simple equation P = n/N, where N is the total number of equally probable outcomes and n is the number of specific outcomes whose probability you’re trying to calculate. You estimate it when you have frequency and experience data -- what happened in the past and how many times it happened.
Now, two kinds of probability exist: absolute and conditional. Absolute probability involves mutually exclusive events, like heads or tails when flipping a coin. Conditional probability involves dependent events, like flipping a light switch. The light going on is dependent on the flip of the switch.
There's a very simple tool you can use called a probability tree. Anyone who's made it through junior high school has used one. Probability trees are effective tools to use in problem solving, provided the following rules are never violated:
1. Events are mutually exclusive
2. Events must be collectively exhaustive, meaning all possible scenarios and events are included
3. The sum of the tree branches must equal 1
Winning a coin toss is the simplest tree, having 0.5 and 0.5 as the branches.
Interestingly, the consulting firm McKinsey & Co. follows very similar rules when offering their esteemed recommendations. Their recommendations must be M.E.C.E. -- Mutually Exclusive and Collectively Exhaustive. And the Pareto Principle -- a.k.a. the 80/20 Rule -- is an application of a probability tree, predicting that 80 percent of outcomes result from 20 percent of inputs, 80 percent of the problem comes from 20 percent of the causes, etc.
To learn how to predict success, try this exercise in computing probability, based on a real case:
Your company has an innovative new core technology in development which promises to significantly grow the business. Announcements have been made to the press that new products containing the technology will hit the streets in six months. Investors are anxiously awaiting final prototype test results. Your designers are feeling the pressure. Your production engineers are worried, because in order to meet the launch date, production must begin in 10 weeks.
Final testing is tomorrow. Only three outcomes are possible: 1) success, 2) failure, and 3) a technical snafu.
- The probability of success is 0.4
- The probability of failure is 0.1
- The probability of a technical snafu is 0.5
- If the test is successful, there is a 0.95 probability production will begin on time.
- If the test fails, there is a 0.05 probability production will begin on time.
- If a technical snafu occurs, there is a 0.5 probability that production will begin in ten weeks.
What is the probability of meeting the launch date? In other words, try and predict success using the facts above.
You have all the facts you need. See if you can answer the question first, and arrive at an actual number before looking at the probability tree below. It's okay if you can't... you've just learned a very effective tool for predicting success!