Outcomes in Utility Analysis

Outcomes

The second element of utility analysis is the outcome. An outcome is what happens as a result of implementing a certain course of action or selecting an option.

If the San Francisco 49ers play the Dallas Cowboys (an option), there are three possible outcomes (Figure 14-1): the 49ers win, tie, or lose.

If I go to a job interview (an option), there are three possible outcomes (Figure 14-2): I don’t get hired, I’m invited back for another interview, or I get hired.

A jelly bean bet is somewhat more elaborate. The options are the bets; that is, you can bet on picking a red, yellow, or green bean. For each bet there are three possible outcomes: red, yellow, or green (Figure 14-3). Note that the options are disconnected from one another, resulting in three separate trees.

Outcomes are the sole basis for analyzing the utility of options. We measure one option against another—the red bean versus the yellow bean versus the green bean—based exclusively on what we postulate the results would be from executing each option. We must therefore use the identical set of outcomes in analyzing each alternative option. In contrast to options, however, outcomes as a general rule should be collectively exhaustive— inclusive of all possible outcomes.

We can, if we deem it appropriate, analyze just one outcome. In the case of our jelly beans, we could consider picking only a green bean. With regard to the 49ers-Cowboys game, we could analyze only the possibility of winning or, in regard to my job interview, only the chance of my being hired. But doing so would sacrifice the huge potential of utility analysis to examine these problems in their fullest dimensions. It’s our old nemesis focusing that we must beware of, lest we concentrate solely on the desired outcome and ignore, to the detriment of our analysis, the seemingly less desirable alternatives. There are, of course, rare instances when the decision maker is interested in only a single, specific, narrowly defined outcome. But, as a general rule, when doing utility analysis, we should examine the full range of possible outcomes, not just one.

The nature of the problem—the factors driving it and the solution—dictates which outcomes to consider. In gambling (betting on, say, jelly beans), the primary interest is in winning or losing money. In sports, it’s winning or losing the game. In job interviews, it’s being hired or not being hired. I call these groupings of alternative, closely related outcomes classes of outcomes. I find that in most problems the spectrum of possible outcomes is covered best by defining three outcomes that encompass all possibilities: one at either extreme and one in the middle, as in “win/tie/lose” or “none/some/all.” In any event, always try to boil down the outcomes to as few as possible, keeping in mind the principle of major factors.