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Alejandro Silvestre
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I will not attempt to improve the definition provided by the textbook,1 because I know that I
cannot make it better and shorter. The definition says that decision support systems (DSS) provide
analytical models or tools for analyzing large quantities of data for middle managers who face
semi structured and unstructured2. DSS use internal information from TPS and MIS and usually
information from external sources; these systems use a variety of models to analyze data, or they
condense large amounts of data into a form in which decision makers can analyze them3.

Now, I will try to tackle the last part of the question and differentiate DSS from other ordinary types
of information systems in terms of their architectures. First, we should identify the components of
DSS. DSS have basically three components: The DSS Database or repository of data (which
includes information from TPS and external sources), The Model Base or DSS software system
(includes OLAP tools, data mining tools, or mathematical and analytical models4), and The User
Interface. The TPS' components are also three: The TPS Database, The Database Management
System (DBMS), and The User interface.

We have established the components of each of the two types of information systems. It is time to
compare them. The first difference can be found in the input process or the data that each system
type uses. While TPS use only internal information such as daily routing transactions like sales
orders (originate in POS systems). DSS uses internal (usually the output of TPS) and external data,
like expected weather conditions, product prices of competitors, or expected value of economic
variables (e.g. currency exchange rates, unemployment rate, etc.).

Despite the fact the mentioned difference is important; I believe that it is not the crucial one. In the
following component, we will have the distinctive differentiation. TPS second component is the
DBMS which only does data processing or a simple calculation. Examples are totals of weekly,
monthly or yearly sales. As we mentioned the results are just calculations and the information
always refers to past data, from a minute, month, or year ago, but always to the past.

On the other hand, DSS second component, the model base, is a step up from the TPS' second
component. The model base has a theory, model or knowledge embedded. These models or
theories are the ones that allow DSS to produce forecasts analyzing the historical data supplied.
The output that DSS produce is expected future data. The inferences that DSS make are by no
means infallible, because they depend on having used the correct model, as we will see in
question number two (HSBC) sometimes this is not the case.

The models embedded in DSS are the ones that allow this type of systems to resolved unstructured
problems and reply to what if questions. For example, what will happen with our revenue if the
gas price hit $5 during the next quarter. In order to answer this question during the design of the
DSS we should have included a model explaining which is the effect of gas prices in the demand of
our product is.

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In the third component, the user interface, there is not a major difference between DSS and TPS,
since this is a major cosmetic component on how the information is presented and accessed by the
user. Perhaps the major difference could be found in the amount of variables presented while TPS
output will be just focus in just one particular variable 5 (e.g. sales), DSS present multiples
variables (e.g. sales, expected demand, expected costs, etc.).


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HSBC had sophisticated information systems which would have been able to handle the relevant
variables and analytical tools to proper measured the credit risk and avoid the crisis. Proof of this,
it is that after the subprime loan crisis HSBC quickly adjusted its models and implemented new
policies and promptly corrected the problem from that moment on.

The problem was caused not by the Technology side, but by the human side: Management and
Organization. The Model Base used by HSBC's Decision Support Systems was not flawless and it
was not prepared to evaluate unusual situations where for example: a real estate bubble was
being created, a economic recession was on the verge, or when loans were being given with little
or no down payment, and even without any support documentation. The decision to use a certain
model as the most accurate to be loaded in a DSS relies on the management.

Nobody would like to do on purpose a mistake, so even if as I have just said the management is at
fault for the crisis suffered by HSBC; I consider that I only answered the first question6; the short
answer is because the correct model base was not used.

The second question7, I believe it has to do more with psychology than anything else. The reasons
behind this can be found re-reading the fabulous speech by Charlie Munger about Psychology of
Human Misjudgment8. The HSBC management suffered a lollapalooza effect of several of the
causes for misjudgment. The first one is under-recognition of the power of incentives, in other
words the Management were being greedy, they were after short term great performances to
achieve their bonuses instead of thinking about the long term.

Another cause that they suffered was confirmation bias, which is simply ignoring early red flags
which showed that their models for estimating risk were flawed, not because they on purpose
ignore them, but because they literally could not see them. Another one that played a role in the
crisis was the deprival super-reaction syndrome or bias caused by scarcity. This can be found
when HSBC decided to start accepting pools that included state-income loans due to intense
competition for mortgages9 ³´less mortgages available!!, let's take anything!µ

Last but not least, one important cause for the misjudgment was social proof or herd mentality.
Since every other bank was doing the same (Citigroup, Bank of America, Wachovia, etc.), HSBC
must do it as well. Unsurprisingly one of the banks to avoid this effect and which passed the
subprime crisis almost unscathed was Wells Fargo, which is partly owned by Berkshire Hathaway
where Mr. Munger is Vice-Chairman.

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Finally, I would like to tell you a story (yes, I am very much into stories, it must be because I have
to tell a new one to my four year-old every night before bed) when I was in my teens, I briefly
worked as a IT support call guy. One thing that I learned from those days it was that usually the
problems with the PC and systems where not located in the hardware or software, but in the thing
that it is located between the monitor and the chair: the user. In the HSBC crisis the human factor
(management) was at fault, not the poor and efficient technology.