Decision Making Under Different States of Nature

In the previous topic on types of decisions you have seen that a decision-maker may not have complete knowledge about decision alternatives (i.e., High Problem Complexity) or about the outcome of a chosen alternative (i.e., High Outcome Uncertainty). These conditions of knowledge are often referred to as states of nature and have been labelled. 

1. Decisions under Certainty, 
2. Decisions under Risk, and 
3. Decisions under Uncertainty. 

Figure depicts these three conditions on a continuum showing the relationship between knowledge and predictability of decision states. 

Decision Making Conditions Continuum

Decision Making under Certainty

A decision is made under conditions of certainty when a manager knows the precise outcome associated with each possible alternative course of action. In such situations, there is perfect knowledge about alternatives and their consequences. Exact results are known in advance with complete (100 percent) certainty. The probability of specific outcomes is assumed to be equal to one. A manager is simply faced with identifying the consequences of available alternatives and selecting the outcome with the highest benefit or payoff. 

As you can probably imagine, villagers rarely operate under conditions of certainty. The future is only barely known. Indeed, it is difficult to think of examples of all but the most trivial business decisions that are made under  such conditions. One frequent illustration that is often cited as a decision under at least near certainty is the purchase of government bonds or certificates of deposit. For example. as per the assurance provided by Government of India, Rs. 1.000 invested in a 6-year National Savings Certificate will bring a fixed sum of Rs. 2,015 after six completion years of investment. It should still be realised, however, that the Government defaulting on its obligations is an unlikely probability, but the possibility still exists. This reinforces the point that very few decisions outcome can be considered 'a sure thing'.

Decision Making under Uncertainty

A decision is made under conditions of uncertainty when a single action may result in :  than one potential outcome, but the relative probability of each outcome is unknown. Decisions under conditions of uncertainty  are unquestionably the most difficult. In such situations a manager has knowledge whatsoever on which to estimate the likely occurrence of various alternatives. Decisions under uncertainty generally occur in cases where no historical data are available from which to infer probabilities or in instance which are so novel and complex that it is impossible to make comparative judgement. 

Examples of decisions  under complete uncertainty are as difficult to cite as example of decisions under absolute certainty. Given even limited experience and the ability to generalist from past situations, most managers should be able to make at least sortie estimate of the probability of occurrence of various outcome. Nevertheless, there are undoubtedly times when managers feel they are Gatling with complete uncertainty. 

Selection of a new advertising programme from among several alternatives might be one such example. The number of factors to be considered arid the large number of uncontrollable variables vital to the success of such a venture can be mind-boggling. On a personal level, the selection of a job from among alternatives is a career decision that incorporates  a great deal of uncertainty. The number of factors to be weighed and evaluated, often without comparable standards be overwhelming.

Decision Making under Risk

A decision is made under conditions of risk when.a single action may result in more than one potential outcome, but the relative probability of each outcome is known. Decisions under conditionals of risk are perhaps the most Communion. In such situations, alternatives are recognized, but their resulting consequences are probabilistic and doubtful. As an illustration, if you bet on number 6  for a single roll of a dice, you have a 6 probability of winning in that there is only one chance in six of rolling a 6. While the alternatives are clear, the consequences is probabilistic and doubtful. Thus, a condition of risk  may be said to exist. In practice, Malingers assess the likelihood of various outcomes occurring on past experience, research, and other information. A duality control inspector, for example, might determine the probability of number of 'rejects' per production run. Likewise, a safety engineer might determine the probability of number of accidents occurring, or a personnel manager might determine the probability of a certain turnover or absenteeism rate.