V.2:5 (174-180): Decision Making by Fred Gehm

Decision Making by Fred Gehm

One group of techniques that traders should know more about are those for multiple-criteria decision making. These techniques allow the trader to simultaneously analyze a number of alternatives in terms of a number of attributes or criteria, allowing the traders to simultaneously maximize rewards and minimize risks. Most of the powerful and interesting multiple-criteria decision making techniques require a computer, but some can be done freehand.

One of the easiest and most valuable decision making techniques available is also one of the oldest. Tradeoff analysis seems to have been first discussed by Benjamin Franklin in a 1772 letter to Joseph Priestley. I will not attempt to improve on Franklin's prose and will therefore quote his entire letter.

"London, Sept. 19, 1772

Dear Sir,

In the affair of so much importance to you, wherein you ask my advice, I cannot, for want of sufficient premises, advise you what to determine, but if you please I will tell you how. When those difficult cases occur, they are difficult chiefly because while we have them under consideration, all the reasons pro and con a re not present to the mind at the same time; but sometimes one set present themselves, and at other times another, the first being out of sight. Hence the various purposes or inclinations that alternatively prevail, and the uncertainty that perplexes us. To get over this, my way is to divide half a sheet of paper by a line into two columns; writing over the one Pro, and over the other Con. Then during three or four days' consideration, I put down under the different heads short hints of the different motives, that at different times occur to me, for or against the measure. When I have thus got them all together in one view, I endeavor to estimate their respective weights: and where I find two, one on each side, that seem equal, I strike them both out. If I find a reason pro equal to some two reasons con, I strike out the three. If I judge some two reasons con, equal to some three reasons Pro, I strike out the five; and thus proceeding I find at length where the balance lies; and if, after a day or two of further consideration, nothing new that is of importance occurs on either side, I come to a determination accordingly. And, though the weight of reasons cannot be taken with the precision of algebraic quantities, yet when each is thus considered, separately and comparatively, and the whole lies before me, I think I can judge better, and am less liable to make a rash step, and in fact I have found great ad vantage from this kind of equation, in what may be called moral or prudential algebra.

Wishing sincerely that you may determine for the best, I am ever, my dear friend, yours most affectionately.

B. Franklin"