31 Aug Good Decisions Require Good Models

Good Decisions Require Good Models 

Causality-Based Concepts and Decision Making 

Douglas T. Hicks, CPA 

Executive Summary 

• In order to understand the real world phenomena around us we create models that make complex realities understandable. This is as true in business as in any other part of life. To make good decisions, our models must be valid; they must be an accurate representation of the world around us. It is our models that determine our behavior, not the phenomena themselves. 

• In business, one model that has proven to be invalid at most twenty-first century organizations is its cost model. By using this invalid model, decision makers are led to make inappropriate decisions and take ineffective actions. 

• Autopsies on failed businesses indicate that blame can usually be placed on one or two basic flaws in management’s understanding of their business’ economics. 

• Causality-based concepts have been developed to correct the deficiencies in invalid cost models. Unfortunately, most businesses have assumed that these concepts can only be adopted through the implementation of a complex and costly new “ABC system.” Fortunately, nothing could be further from the truth. 

• Causality-based concepts can be economically incorporated into the decision making processes of any organization. What is required is the development of a valid intellectual model – one that provides an accurate version of the organization’s economic realities – and decision makers who know how to use that model to their advantage. 

• There are many ways of incorporating a valid cost model into an organization’s decision support system – implementing a new “ABC system” is only one option. The method used is dependent on the individual circumstances of each organization. 

• Invalid models lead to inappropriate decisions and inappropriate decisions lead to poor results. Armed with a valid cost model that provides them with accurate product, service, process, and incremental cost information, decision makers can improve the quality of their decisions and lead their organizations into a more successful future. 

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