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B.5 Decision Making Situations
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- Decision Making Under Risk
| B.5 Decision Making Situations In general, there are three (3) possible situations under which managers make decision, these are A. Decision Making Under Certainty, B. Decision Making Under Risk, and C. Decision Making Under Uncertainty. ab Decision Making Under Certainty Certainty means that the relevant parameters such as costs, capacity, and demand have known values. Decision making under certainty is a situation or condition in which all the information needed by the decision maker to make decision are available. It is, a situation in which action taken will lead to only one outcome. Here, a complete knowledge about the nature of future conditions is known. Ina situation involving certainty, a decision maker is reasonably sure of what will happen when he/she is making a decision. Here, information is available and is considered to be reliable and decision-maker knows the cause and effect relationships. Decision making under certainty is also known as deterministic situation or deterministic optimization problem. b. Decision Making Under Risk Risk means that certain parameter have probalistic outcomes. Also, risk is the condition under which decision makers can define a problem, specify the probability of certain events, identify alternative solution and state the probability of each solution leading to the desired results (Bell, 1988). Ina situation involving risk, the decision maker knows the likelihood (i.e., chance) that each of the various state of nature will occur, that is, each action will lead to an outcome with known probability. In short, risky situations is the condition that exists when decision makers must rely on incomplete, yet reliable information in other words, one may have factual information but it maybe incomplete. 127 Furthermore, in a risky situation, there are many states and the decision make knows the probability of occurrence of each of these many states. Such decision situation is prevalent or common in today’s business environment since in many business problems, the probability of various states are known through the determination of how frequently they occur in the past. Risky situation can also be called stochastic situation. From business decision-making point of view, risk means a situation in which a business decision is expected to yield more than one outcome and probability of each outcome is known to the decision maker or can be reliably estimated. c) Download 3.37 Mb. Share with your friends:
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