Managerial Decision-making Under Uncertainty

“Knowledge is an unending adventure at the edge of uncertainty”. Today all of us are living in a VUCA environment which we experience daily. It is expected that we adapt to the new scenario and change our behavior accordingly. Managers continuously need to make rational decisions concerning their personal and professional front. They must understand how to make decisions under risk and uncertainty. As Stephen Covey says “there is only one thing which is certain in business and that is uncertainty”.  rnA condition in which particular decisions are taken, with little or no former information, with a limited prediction about the outcome is said to be an uncertain decision. Prior information helps managers analyze the present situation better. One can build scenarios based upon the previous history and project future conditions and results. Under certain situations, accurate, quantifiable, and trustworthy information is available with managers to make rational decisions. That helps them to devise a cause-and-effect relationship and formulate the basis for better decision-making. rnUnder uncertainty and risky situations, there is information asymmetry. The predictability of future scenarios is very bleak. That leads to poor decision-making. Managers lack an overall grasp on the situation and hence not able to proceed with the rationalization of their decisions. Developing and evaluating alternatives with future scenarios is difficult. They are built for predicting favourable outcomes.  rnToday during the COVID-19 pandemic almost all the managers are faced with this situation and trying to navigate their way through it. Different complexities like demand estimation, inventory stock up, purchase schedule, advertising expense, promotion budget, new recruitment schedule, and many such decisions have been affected by the COVID-19 pandemic. It is difficult to make decisions under uncertainty, as probabilistic methods cannot predict the consequences for the desired choices. What comes in handy is a personal judgment based on his knowledge and previous experience from which the new potential outcome and associated benefits can be formulated. Other than this some management tools can also be used for the analysis. So, what are these management tools one can use to move forward? Managers can use the following three useful tools for decision-making under uncertainty.  rn1.Risk analysis rnThis tool helps managers assess the size and nature of risk associated with the decision and therefore choosing a specific option. It involves both qualitative and quantitative methods of analysis. The result is coupled with evaluating the risk associated with the decision and benefits accrued with it. This can be explained simply by considering a new product launch decision example. In today’s scenario estimating the market size, demand analysis, consumer preference, are critical components. This will guide further decisions like production cost, raw material and capital investment, production schedules, and price of the product. Finally, the market share, market launch plan along product launce story becomes critical. rn1.Preference utility theoryrnDifferent managers have varying degrees of risk-taking ability. Their attitude towards risk is either risk-averse or risk-takers. Risk-averse managers take decisions that are less risky while risk-takers have a large risk appetite and are ready to gamble by taking risky decisions. So, the outcome of the decisions is based on the risk preference type of the manager. The same decision can be executed by two different individuals with contradictory results. Their attitude towards risk depends upon the decision context, job position, and related people. This can be explained by the decision example of a new advertisement campaign. The launch of the new advertising campaign decision will be looked at by two types of managers. Risk-averse managers may postpone it due to the COVID-19 context and risk-taker may use innovative media to make it more successful. Sometimes good opportunities can be lost or great losses can be experienced due to the nature of their risk appetite. rn1.Decision TreernThis is a more logical and structured approach to decision-making in a time of uncertainty. Managers can map and draw a decision tree for a specific decision. It is a graphic representation of the decision problem. It showcases problem statements, alternatives, possible solution scenarios, the risk associated with it, and possible benefits. This is then connected with statistical probability with each alternative to decide the best decision. Managers can plan and evaluate various scenarios before taking desired decision.