DECISION MAKING UNDER CERTAINTY, RISK & UNCERTAINTY

Explain the difference between decision-making under certainty, risk and uncertainty.

Decision making is a process of identifying problems and opportunities and choosing the best option among alternative courses of action for resolving them successfully. Usually, there are three different conditions under which decisions are made; these conditions are explained as follow:

Conditions under certainty are which the decision maker has full and needed information to make a decision. Decision is made under the condition of certainty.  The manager knows exactly what the outcome will be, as he/she has enough clarity about the situation and knows the resources, time available for decision-making, the nature of the problem itself, possible alternatives to resolve the problem, and undoubtedly clarify or certain with the result of alternatives. In most situations, the solutions are already available from the past experiences or incidents and are appropriate for the problem at hand. The decision to restock food supply, for example, when the goods in stock fall below a determined level is a decision-making under circumstance of certainty.

Conditions under risk provide probabilities regarding expected results for decision-making alternatives, it is due to the nature of the future conditions that are not always know in advance and the managers face this condition more often in reality compared to conditions under certainty. Although some good information may be available, it is not enough to answer all questions about the outcomes. The manager could define the nature of the problem, possible alternatives and the probability of each alternative leading to the desired results, but could not guarantee how each alternative may work. Decision has clear-cut goals, but future outcomes associated with each alternative are subject to chance. Testing of nuclear leakage in Japan after the Tsunami hit in Year 2011 is a risky decision made by Japanese Government, as the government do not know how wide the range of effecting area and the nuclear substance itself is a life threatening factor.

Conditions under uncertainty provide no or incomplete information, many unknowns and possibilities to predict expected results for decision-making alternatives. The manager cannot even assign subjective probabilities to the likely outcomes of alternatives. Each of the possible states of nature of the problems causes the manager himself can not predict with confidence what the outcomes of his action to be. An assumption is often made; the manager has no information or intuitive judgment to use as a basis for assigning the probabilities to each state of nature. Managers may have to come up with creative approaches and alternatives to solve the problem. Flood, for example, may causes panic and environment of uncertainty among the victims, which leads to uncertain decision making of the victims, some may flee from home and take only important documents with them, some who live at higher ground, may wait and observe if the flood worsen then decide the next approach.