When making a decision under a condition of risk

If there’s one thing that is constant in life, it is that the only real certainty is uncertainty. And never has that been truer than now. In the past six months, the most immaculate plans of business leaders and policymakers failed because of the COVID-19 pandemic.

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Decision-Making Under Risk And Uncertainty
Now let’s take a look at the process of decision-making under risk and uncertainty:
Condition of Risk
Condition of Uncertainty

With uncertainties and risks looming at every corner, how do we make long-lasting decisions?

Well, there is always a method to the madness, and a careful and strategic approach can help you in decision-making under uncertainty. Let’s find out about this in detail.

Decision-Making Under Risk And Uncertainty

Making decisions under certainty is easy. The cause and effect are known, and the risk involved is minimal. What’s tough is making decisions under risk and uncertainty. The outcome is unpredictable because you don’t have all the information about the alternatives. Before we learn deeper about decision-making under risk and uncertainty, let’s look at each of these situations:

Sometimes we have enough facts and evidence to know the possible results of a decision. These are the most conducive situations for decision-making because the outcomes are quite obvious. For instance, if you drop a glass full of milk, the milk will definitely spill. Such an environment is known as certainty.

Risk is where you are unsure of what can happen, but you know the likelihood of a particular outcome. Let’s say you invest in a promising stock and the stock market is on a surge. In such a scenario, you see a higher chance that your investment will grow. However, you don’t know the extent to which it can grow. It might double or increase by 10% and in the worst-case scenario, you might even lose money if the market crashes. Taking a decision under such circumstances is known as decision-making under risk.

In case of an uncertain environment, you can’t predict the outcomes as you have no information or data available. You have no control over what might happen and don’t even know the options you have.

It is like driving blindfolded where you know you need to move but don’t know the type of vehicle or the road you will be taking. Such a scenario will lead to decision-making under uncertainty.

Now let’s take a look at the process of decision-making under risk and uncertainty:

There are times when you need to make decisions even when you don’t have adequate or credible information or when the information obtained from different sources doesn’t match up.

This happens when you don’t know for sure how each of the alternatives will pan out and whether you will be able to achieve the goal by taking a particular decision. However, you have enough understanding to know how likely each option is to be successful.

It is this likelihood or probability of each of the options that a manager needs to take into account and apply experience, expertise, and gut feeling to the process of decision-making.

Despite all the data crunching and predictive technology, businesses these days have to deal with a lot of uncertainty and the ‘what if’ scenarios.

The recent pandemic outbreak has dramatically altered the business landscape globally. Today, decision-making has become more complicated due to the uncertainty all around us.

Let’s say you want to open a couple of new stores for your retail chain, and you have an idea about the average footfall or the earning that an average outlet generates. Yet, there is a lot of uncertainty as the operational procedures and customer behavior has become unpredictable.

Hence, you are compelled to undertake decision-making under uncertainty.

However, decisions under uncertainty are different from decision-making under risk. In the latter case, you are not even aware of all the options you have, the risks that each alternative poses, and the outcomes of all of these options. In fact, you are not even aware of the probabilities when you opt for decision-making under risk.

It becomes imperative for managers to use their experience and make assumptions about the situation and the outcomes while making decisions under uncertainty. However, they have to rely less on their individual judgment while indulging in decision making under risk.

Conclusion

Risk and uncertainty in decision-making are integral to modern business operations. However, by opting for a specialized course on decision-making under risk and uncertainty, Harappa Education’s Making Decisions course, you can learn the art of making better decisions at all times. The course has a section on The Uncertainty Toolkit which provides insights and information about various techniques that you can adopt in an environment of risk and uncertainty in decision-making. The module uses a mental model that specifically prepares you for the uncertainty about decision-making. It is an easy-paced online course that you can complete from your home’s safety and become an efficient decision-maker. Sign up now and sharpen your decision-making skills.

Explore topics such as Ethical Decision Making, Decision Making in Groups, Group Decision Making Techniques from our Harappa Diaries blog section and develop your skills.

Managers make several decisions during the course of business activities. Sometimes they are sure about the future conditions but sometimes they have difficulty estimating the future conditions. It is important for the manager to know in which condition the decision is to be made. A decision made relating to the situation helps to adjust to that situation. There are three conditions of decision-making. They are:

Let’s take a deep look,

Certainty condition of decision making is a situation where a decision-maker is conformed to what will happen when a decision is being made. It is a condition where the future is 100 percent sure.

The future situation is conformed because of the availability of reliable information and their cause and effect are known. Due to known conditions, there are no conflicts in decision-making. Similarly, it saves time in decision-making.

As we know, to make a decision we choose the best course of action from available alternatives. Here one best alternative is selected and its outcomes are also known which provides the optimum outcomes.

This condition exists in routine decisions such as day-to-day activities, payment of wages, salaries, etc. Another example is when a person is going to buy a car, he can collect all the relevant information about that car, and he gets confirmed what type of car he is buying.

Therefore, it is easy and simple to make a decision in the condition of certainty and there is less chance of ambiguity.

Condition of Risk

In the condition of risk, the decision-maker is aware of alternatives but not of their outcomes or consequences. Here the future condition can not be estimated correctly. It is a condition where the future is sure but less than 100 percent.

There are chances of both conditions either the decision which is made leads to success or leads to failure. In other words, there is a 50/50 between success and failure.

Due to the incomplete information, it is difficult to predict future conditions for the manager. So to get full information he can collect the required information through research, knowledge, experience, and other available information. After collecting the information it can be analyzed through judgment and statistical analysis and the alternative which has the highest expected outcome can be selected.

It is quite difficult and time-consuming to make a decision in a risk condition as compared to the certainty condition. And, there is a chance of ambiguity and impractical decisions.

Condition of Uncertainty

Uncertainty is a situation where the decision-maker has very little information available about the alternatives. Which is not enough to take an action plan.

Due to the unavailable information, the manager is unaware of the situation he is facing, he is unknown of the consequences associated with the alternatives. Uncertainty arises due to lack of information, the introduction of a new product or service, adoption of new technology, etc. It creates difficult to understand the environment, predict the future and make a decision.

Thus to make a good decision a manager must collect the relevant information as fas as possible. Because of not enough information statistical analysis is not possible here. Qualitative tools such as judgment, intuition, and experience play a vital role in the collection of information in an uncertain situation.

After that decision can be made in the condition of uncertainty, but, there is more chance of an ambiguous future and more possibilities of error.

Therefore we may conclude that, in the conditions of decision making, the errors can be ranked as: