Making Decision under Certainty and Uncertainty

Published: Jan 2, 2012

Two Types of Decision Making Conditions

The conditions for making decisions can be divided into two types, certainty and uncertainty.

Decisions made under certainty or uncertainty are based on our feelings and our experiences.

1. Certainty

We experience certainty about a specific question when we have a feeling of complete belief or complete confidence in a single answer to the question.

Decisions such as deciding on a new carpet for the office or installing a new piece of equipment or promoting an employee to a supervisory position are made with a high level of certainty.

While there is always some degree of uncertainty about the eventual outcome of such decisions there is enough clarity about the problem, the situation and the alternatives to consider the conditions to be certain.

2. Uncertainty

A decision under uncertainty is when there are many unknowns and no possibility of knowing what could occur in the future to alter the outcome of a decision. We feel uncertainty about a situation when we can't predict with complete confidence what the outcomes of our actions will be. We experience uncertainty about a specific question when we can't give a single answer with complete confidence.

Launching a new product, a major change in marketing strategy or opening your first branch could be influenced by such factors as the reaction of competitors, new competitors, technological changes, changes in customer demand, economic shifts, government legislation and a host of conditions beyond your control.

These are the type of decisions facing the senior executives of large corporations who must commit huge resources.

The small business manager faces, relatively, the same type of conditions which could cause decisions that result in a disaster from which he or she may not be able to recover.

Solution Methods Differ

Under certainty the decision maker can rely on the standard "Vanilla" process described in this section as, "Decision Analysis." There you are advised to proceed through the steps of: Problem Definition > Background Information > Situation Description > Alternative Solutions > Recommendation. Following these steps, the small business manager will reach a satisfactory decision in most cases.

Most often, the small business manager, (a) has little time for research, (b) doesn't need an exhaustive analysis, (c) can accept the risks and (d) can make reversible decisions.

Large corporations, on the other hand, may have millions of dollars for research, the risks may be highly punitive and commitments are not easily reversed.

Here are some of the reasons why you can't play with the big boys...

The Small Business Compromise

The small business manager needs some skills and methods to make decisions under uncertainty. He or she needs techniques that match the limited time and money budgets of the smaller enterprise. Therefore, this section on Decision Making will try to adapt many of the sophisticated techniques to a more practical level for the small business.

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