Decision-making conditions:

Risk and uncertainty

• Why do we need to distinguish between these two
terms?
• Individuals dislike uncertainty even more than they
dislike risk.
• Vague or unknown probabilities of success are more
likely to discourage managers from undertaking actions
than is risk.
• This negative influence of uncertainty has implications
for all sorts of decisions such as hiring new employees,
introducing new products, or acquiring other firms.
 Decision-Making Tools
• Most managers develop an intuition about what
decisions to make.
• A largely subjective feeling based on years of experience
in a particular organization.
• Which gives them insights into decision making for that
industry or organization.
• Although intuition is often an important factor in making
a decision, managers generally emphasize more
objective decision-making tools.
• The two such most widely used tools are probability
theory and decision trees.
 • It is a decision-making tool used in
risk situations.
• Situations in which decision
Probabilit makers are not completely sure of
y Theory the outcome of an implemented
alternative.
• Probability refers to the likelihood
that an event or outcome will
actually occur, which is estimated
by calculating an expected value
for each alternative considered.