Decision Making Under Uncertainties – Statistical Modeling

Whether it is filling out March Madness bracket or making investment decisions on a venture it all comes down to scenario analysis taking into account the variabilities. Because it is the variance that kills you.

In past years The Journal used to run Blindfold March Madness Bracket to help us make data driven decisions to fill out the bracket and pick the winner. This year they simplified it for us and yet made it extremely sophisticated. They codified the priorities, added a way to introduce a level of randomness and made a sophisticated statistical modeling for scenario analysis.

In essence we all can be Nate Silver with this model.

Whether it is filling a bracket for entertainment or a key investment decision the process comes down to what WSJ recommends:

  1. Choose a starting point: What is important to you?
  2. Customize your priorities: Assign relative priorities – like is it the people? market? traction?
  3. Account for unknowns
  4. Understand your biases and quantify the level of bias you have – for example how you “feel” about the person
  5. Run statistical simulation

How do you make decisions under uncertainty?