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Decision Matrix: A mathematical model to maximize profitability

Posted in Uncategorized by Robert Lindsay Thompson on January 5, 2011

Simple Mathematical Matrix for Evaluating Opportunity

I recently created a simple mathematical matrix for evaluating which money making opportunities would be the best to invest my time, talents and energy into in 2011.  I am a strong believer that intuition, passion and purpose should be the ultimate guiding forces.  However, there is a place for analytical tools as well.  I will assume you, the reader, has a basic working knowledge of Ms Excel.

For those who are interested, you can access and copy this spreadsheet at Google docs: Decision Matrix.  If you have any questions or problems, just let me know.

First of all, I listed 7 or 8 money making options under each of two general categories.  1. Current business  2. Prospective business(es).   Then beside each of the 16 options I listed my decision criteria:

  • a. Upside (high case) $$.
  • b. Downside (low case) $$.
  • c. Overall Odds ( likelihood of success; ie generating $$, expressed as a percentage).
  • d. Interest.  (personal passion index from 1-10)
  • e. Formula: derived from averaging upside and downside (a+b/2), times overall odds (*c), multiplied by my interest level (divided by the dollar range – number of zeros; thus d/10000 because of 5-6 figure potential was the $$ range of my prospects +1

Therefore the overall formula is expressed thus in Ms Excel: =(C4+D4/2)*E4*(F4/10000)+1. The formula creates a value expressed in 1.xx that will help you evaluate the best money making opportunities available to you from the options you list.  Further calculations can help you estimate the range of money you are likely to generate.

To do this, first I summed the list 16 prospects thusly: sum column “a” (upside), sum column “b” (downside) and average column “c” (odds).  Averaging the upside total (a) and the downside total (b) multiplied by the average odds will give you an idea of the range of money you will generate IF you were to pursue ALL your listed options.  However, this is unlikely.  However this creates a good baseline for comparison.

Then choose the best couple of options from your list (remember the 80/20 rule).  Of my 16, i chose 4.  Then run the same calculations on these choices: upside (a), downside (b) times average odds (c).  What I discovered is that – because the potential $$ and odds were higher on my 4 choices then the 16… the resultant total potential $$ was higher on the 4, then it was on the 16!  I would have a greater shot at making money investing my time, talents and energy in 4 things than I would at 16!

In addition, I came up with a reasonable estimate of the $$ i am likely to generate given the pursuit of my chosen options.  It also gave me a list of options I may want to invest myself in that may not bring the highest earning potential, but are things I can do “on the side” that i have a high interest in/passion for.  Keeping in mind that i can’t depend upon them as a main stay of my income.  Hope this helps.

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