Decision Making Under Uncertainty
In this article George Chacko, among others, describes the process of decision making under uncertainty, in a practical way. After reading it, you will understand the basics of this powerful decision making tool.
What does decision making under uncertainty entail?
Many managers and leaders know that making the right decisions quickly e is a challenge, even under the best circumstances. However, the most difficult decisions are the ones that come with uncertainty and high stakes.
A recent factor of uncertainty, for example, is COVID-19, during which managers and other supervisors are dependent on external developments when it comes to making decisions. Uncertainty in the workplace can lead to a lot of stress.
Even more so than the actual knowledge that bad results lie ahead. That is why dealing with uncertainty is a crucial skill for both managers and supervisors.
Many leaders believe the workplace is a mathematical problem to be solved, rather than a lottery.
The common notion is that when enough data is collected, the formula has been sufficiently understood and past mistakes have been thoroughly assessed, the right answer will come automatically. In reality, however, it works differently.
Being a leader demands constant assessment and estimating of the situation, including the uncertainties. It is important to acknowledge that every situation has a level of uncertainty, no matter how difficult it may be to accept this.
The people that fail to acknowledge this uncertainty believe that making the right decisions is purely based on data, including information about the past. This approach to decision making can lead to overconfidence as it reduces important opportunities involved with risk management.
Definition decision making under uncertainty and risk
In decision making that involves risk, the decision maker is aware of the potential results and the likelihood of risks materialising. Uncertainty refers to scenarios in which this information is barely available. Therefore, uncertain decision making is actually decision making without all the information about the potential risks.
However, risk also implies a degree of uncertainty and, at the same time, an inability to fully control the outcomes and consequences of a decision. The removal or reduction of risks is therefore an important core task of managers. The effective handling of risk and risk management requires assessing the risks and taking measures to address those risks.
What does decision making influence?
There are some factors or areas which are directly affected by the way decision making is shaped.
Firstly, there is the allocation of resources. There are several ways in which organisations can utilise available resources. With the right decision making style and skills, these resources can be used in the most efficient way. When the decision making suffers, valuable resources can be wasted and high costs will have to be paid.
Additionally, the degree and style of decision making has a direct influence on the job satisfaction and motivation of employees within a company.
Overall employee satisfaction, engagement and motivation can be influenced by the ability of managers to make certain decisions. Employees in management positions who often make bad decisions usually feel that they are not receiving the best instructions from their supervisors.
As a result, these employees lose motivation to keep performing at a high level. This ultimately leads to a reduced satisfaction level and can even lead to delays: employees who turn their backs on the company and go to work elsewhere.
While it may sound obvious, decision making also affects the achievement of personal and professional goals. Bad decisions can lead to mistakes, misunderstandings, miscommunication and even conflict, whereas good decisions can lead to increased productivity and more effective resource management.
Ultimately, this leads to a fast and effective realisation of objectives. Uncertainty in decision making hinders effective decision making because much of the data and input needed to make good decisions is unclear or unavailable.
When executives within an organisation gain a reputation for bad decision-making, the corporate culture almost always suffers. Employees no longer trust management or they feel that they cannot count on and trust their leaders to make decisions that will positively impact their work.
However, effective and accurate decision making gives employees a sense of security in their job because they feel involved in the organisation.
Essentially, decision-making affects the organisation’s overall ability to grow. Making bad decisions can lead to damaging situations or developments which hinder the growth of an organisation. Solid, carefully thought out decisions actually support a company, so that it can create more opportunities for growth.
Analytical models for decision making under uncertainty
Uncertainty plays an important factor in decision making. The purpose of analysing uncertainty is not necessarily to reduce it, but to better understand uncertainty and its impact on decision making. There are various methods and tools available to analyse uncertainty.
Examples of this are the sensitivity analysis and the Monte Carlo simulation. Which model is the best option for a given situation depends on the technical details of the problem itself.
The different tools and models available vary. However, there are some general guidelines. These are explained below.
- It is advisable to document the various uncertainties related to a decision. The deeper these are explored, the more uncertainties will be found. However, only a few are of importance
- Describe these uncertainties as precisely as possible
- Evaluate the consequences of alternative decisions If this does not change the desired results, the uncertainties are unimportant in the context of that one decision
- Report the level of agreement and disagreement between those evaluating the decisions and uncertainties. This matters to the person who ultimately has to make the decision
- Provide as much information about the context as possible to understand the relevance and deeper meaning of uncertainties.
Improving decision making
There are some tips or steps that can be taken to heart to improve uncertain decision making. A few of these tips are explained below.
Limiting the options
The fewer options available, the less overwhelming the situation will appear. It is much easier to choose between two options than between ten options. When possible, it is important that the least realistic ideas are eliminated from the outset so that ultimately only a handful of realistic options are to be chosen from.
Determine how important the decision is and how much time you have for it
Before too much time is spent evaluating or developing a decision, it is necessary to determine precisely what importance each option has, and how much time it takes to make an informed decision. Decisions of little importance, such as choosing between different types of ink, should not take up too much time. By determining how much time can be spent on a decision, a manager ensures that the scarce resource of time is used as wisely as possible.
Acquiring as much information as possible
The more research done prior to making the decision, the better the manager is able to make an informed one. It is important to know what factors play a role in the decision and what other information is related to it.
Try to avoid making decisions influenced by emotion
When it comes to decision making under uncertainty in particular, it is crucial that emotions are recognised in the process. Making decisions based on emotions alone can lead to impulse reactions and, ultimately, bad choices. When a manager is emotionally involved in an issue or situation, it is a good idea to step back and look at the facts objectively.
Other tips for uncertainty in decision making
It is very difficult to continue to make confident decisions when uncertainty increases. It is therefore important to recognise that insecurity brings some degree of separation anxiety. Below, you can find some tips in addition to the tips described above to make the best decisions during uncertain times.
- Bring back the time frame for the decision. Take smaller steps towards the future
- Learn as much as you can about the ins and outs of a particular decision before the decision is finally made. Knowledge about a new situation makes you feel confident about the new situation
- Avoid taking unnecessary risks. If the situation or environment creates a lot of uncertainty, assess which risks you can remove. An example of this is postponing the purchase of a new car in the event of financial uncertainty. From there on, the transition into the world of business is easy. For example, hiring new staff when the financial situation may not allow it
- Remind yourself of the values and standards that make you who you are. In addition, invest in keeping as many options open as possible. Having multiple options increases the flexibility to meet the uncertain future
Summary of decision making in uncertainty
Risks are relatively easy to manage, especially if the right measures are taken. Uncertainty is much more difficult to control. Because this is about not knowing what will happen in the future. Risk is therefore something that can be measured and from which measures can be taken.
On the other hand, uncertainty cannot be approached in the same way because no steps can be taken.
It should come as no surprise that uncertainty is an important factor in decision making. Since uncertainty cannot be measured, it is imperative that the implications of uncertainty are understood. There are several methods and frameworks to support this process.
The sensitivity analysis and the Monte Carlo stimulation are well-known models for decision making under uncertainty. Which model best suits the decision depends on the situation and the scope and details of the implications of the decision.
There are some tips that managers can use when making decisions in uncertainty. One of them is to narrow down the time frame for the decision and take baby steps instead.
Now it is your turn
What do you think? Do you recognise the explanation given about decision making in uncertainty? Can you give any examples of situations in which you had to make choices under a lot of uncertainty or risk? Do you have any tips for handling uncertainty in decision making? Do you think uncertainty is increasing in today’s rapidly changing market environment? Do you have any tips or comments?
Share your experience and knowledge in the comments box below.
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- Bell, D. E. (1985). Disappointment in decision making under uncertainty. Operations research, 33(1), 1-27.
- Biswas, T. (1997). Decision-making under uncertainty. Macmillan International Higher Education.
- Hodgkinson, G. P., Bown, N. J., Maule, A. J., Glaister, K. W., & Pearman, A. D. (1999). Breaking the frame: An analysis of strategic cognition and decision making under uncertainty. Strategic management journal, 20(10), 977-985.
- Kochenderfer, M. J. (2015). Decision making under uncertainty: theory and application. MIT press.
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