Decision Analysis for Management Judgment, 6th Edition

16Scenario planning: a way of dealing with uncertainty

Introduction

Scenario planning is a widely used method for dealing with uncertainty. As such, it assumes we are unable to estimate probabilities for future events, and it therefore differs from decision analysis methods designed to handle risk that we encountered in earlier chapters. This chapter outlines the conceptual approach, provides a step-by-step guide to scenario construction, and introduces a simple method of evaluating current decisions against scenarios of plausible futures.

First, consider the following quotation from an article in the magazine Newsweek, which was published on January 28th, 1991. The article was written by a journalist who was analyzing the reasons for US unpreparedness for Saddam Hussein’s invasion of Kuwait. He found that the US intelligence agencies had made a list of predictions, ordered in terms of perceived likelihood. The highest probability was attached to the prediction that Saddam was bluffing. While several, more insightful, voices did predict an invasion, these voices were ignored in the building consensus:

One analyst at the CIA was right, but his warning ‘got lost’ in the momentum of the opposing consensus. Marine Officers, scanning satellite photos that showed Iraqi air-defense units, tanks and artillery deployed at the Kuwait border surmised this could only mean invasion, but kept silent because of bureaucratic pressures.

From this journalistic analysis, three major points ...