BUAD 821 GrpE

BUAD 8211
QUESTION: Decision-making is almost always accompanied by the condition of the concept of

risk and uncertainty. Discuss
DECISION-MAKING UNDER CERTAINTY, RISK AND UNCERTAINTY
Decision-making under Certainty:

A condition of certainty exists when the decision-maker knows with reasonable certainty what
the alternatives are, what conditions are associated with each alternative, and the outcome of
each alternative. Under conditions of certainty, accurate, measurable, and reliable information on
which to base decisions is available.
The cause and effect relationships are known and the future is highly predictable under
conditions of certainty. Such conditions exist in case of routine and repetitive decisions
concerning the day-to-day operations of the business.
Decision-making under Risk:

When a manager lacks perfect information or whenever an information asymmetry exists, risk
arises. Under a state of risk, the decision maker has incomplete information about available
alternatives but has a good idea of the probability of outcomes for each alternative.
While making decisions under a state of risk, managers must determine the probability
associated with each alternative on the basis of the available information and his experience.
Decision-making under Uncertainty:

Most significant decisions made in today’s complex environment are formulated under a state of
uncertainty. Conditions of uncertainty exist when the future environment is unpredictable and
everything is in a state of flux. The decision-maker is not aware of all available alternatives, the
risks associated with each, and the consequences of each alternative or their probabilities.
The manager does not possess complete information about the alternatives and whatever
information is available, may not be completely reliable. In the face of such uncertainty,
managers need to make certain assumptions about the situation in order to provide a reasonable
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framework for decision-making. They have to depend upon their judgment and experience for
making decisions.
MODERN APPROACHES TO DECISION-MAKING UNDER UNCERTAINTY:
There are several modern techniques to improve the quality of decision-making under conditions
of uncertainty.
The most important among these are:
(1) Risk analysis,

(2) Decision trees and
(3) preference theory.
Risk Analysis:
Managers who follow this approach analyze the size and nature of the risk involved in choosing
a particular course of action.
For instance, while launching a new product, a manager has to carefully analyze each of the
following variables the cost of launching the product, its production cost, the capital investment
required, the price that can be set for the product, the potential market size and what percent of
the total market it will represent.
Risk analysis involves quantitative and qualitative risk assessment, risk management, risk
communication, and provides managers with a better understanding of the risk and the benefits
associated with a proposed course of action. The decision represents a trade-off between the risks
and the benefits associated with a particular course of action under conditions of uncertainty.
Decision Trees:
These are considered one of the best ways to analyze a decision. A decision-tree approach
involves a graphic representation of alternative courses of action and the possible outcomes and
risks associated with each action.
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By means of a “tree” diagram depicting the decision points, chance events and probabilities
involved in various courses of action, this technique of decision-making allows the decision-
maker to trace the optimum path or course of action.
Preference or Utility Theory:

This is another approach to decision-making under conditions of uncertainty. This approach is
based on the notion that individual attitudes towards risk vary. Some individuals are willing to
take only smaller risks (“risk averters”), while others are willing to take greater risks
(“gamblers”). Statistical probabilities associated with the various courses of action are based on
the assumption that decision-makers will follow them.
For instance, if there were a 60 percent chance of a decision being right, it might seem
reasonable that a person would take the risk. This may not be necessarily true as the individual
might not wish to take the risk, since the chances of the decision being wrong are 40 percent. The
attitudes towards risk vary with events, with people and positions.
Top-level managers usually take the largest amount of risk. However, the same managers who
make a decision that risks millions of rupees of the company in a given program with a 75
percent chance of success are not likely to do the same with their own money.
Moreover, a manager willing to take a 75 percent risk in one situation may not be willing to do
so in another. Similarly, a top executive might launch an advertising campaign having a 70
percent chance of success but might decide against investing in plant and machinery unless it
involves a higher probability of success.
Though personal attitudes towards risk vary, two things are certain.
Firstly, attitudes towards risk vary with situations, i.e. some people are risk averters in some
situations and gamblers in others.
Secondly, some people have a high aversion to risk, while others have a low aversion.
Most managers prefer to be risk averters to a certain extent, and may thus also forego
opportunities. When the stakes are high, most managers tend to be risk averters; when the stakes
are small, they tend to be gamblers.
REFERENCE:
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 https://www.businessmanagementideas.com/decision-making/decision-making-under-
certainty-risk-and-uncertainty/3371
Access Date: 01/09/2022 Access Time: 13:15 to 15:00 WAT

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BUAD 8211

QUESTION: Decision-making is almost always accompanied by the condition of the concept of

DECISION-MAKING UNDER CERTAINTY, RISK AND UNCERTAINTY

Decision-making under Certainty:

Decision-making under Risk:

Decision-making under Uncertainty:

The most important among these are:

(1) Risk analysis,

Preference or Utility Theory:

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