“Data driven business” is one of the new buzzwords, and we are completely behind an approach to doing business that is fouded on real, observed data and rational decision. John Kay’s recent column Don’t box yourself in when making decisions (from the FT or from John Kay’s site) is a timely reminder of some of the hard limitations of modeling.
Even in very simple cases, it is impossible to be certain that a particular mathematical representation of a real problem is a correct description. For people in business who rely on models and for people in financial services … that is a disturbing conclusion.
The simple case John uses to illustrate his point is a quiz show game:
There are only two boxes and one contains twice as much money as the other. When you choose one, he shows you that it contains £100. Will you stick with your original choice, or switch to the other box?
This problem is real. Anyone who has changed jobs, bought a house or planned a merger has encountered a version of the two-box game; keep what you know, or go for an uncertain alternative. But familiar problems are not necessarily easy to model.
Try to think about the problem before reading the article.