Managing Decision Under Uncertainties Dr. Elijah Ezendu FIMC, FCIM, FIIAN, FBDI, FAAFM, FAAPM, FCCM, MIMIS, MITD, ACIArb, ACIPM, PhD, DocM, MBA, CWM, CBDA, CMA, MPM, PME, CSOL, CCIP, CMC

Learning Objectives At the end of the course, participants should be able to do the following: Recognize the importance of managing decision Identify effects of risks and uncertainties on decisions Identify the sources and levels of uncertainties Manipulate uncertainties effectively while managing decision Conduct decision profiling

At the end of the course, participants should be able to do the following:

Recognize the importance of managing decision

Identify effects of risks and uncertainties on decisions

Identify the sources and levels of uncertainties

Manipulate uncertainties effectively while managing decision

Conduct decision profiling

“ Decisions under uncertainty are high-stakes gambling where factors such as human life, health, economic prosperity, or the environment are concerned.” - Norman Shultz

“ Decisions under uncertainty are high-stakes gambling where factors such as human life, health, economic prosperity, or the environment are concerned.”

- Norman Shultz

“ The complexity of most issues makes it impossible to completely predict what will happen if a particular decision is made or if a dispute is resolved in a particular way. This is very clear in scientific and technical disputes (on the severity or implications of greenhouse warming, for example), but it occurs in non-scientific disputes as well. (For example, how many people will lose their jobs if the government adopts a new economic policy).” Source: Conflict Research Consortium

“ The complexity of most issues makes it impossible to completely predict what will happen if a particular decision is made or if a dispute is resolved in a particular way. This is very clear in scientific and technical disputes (on the severity or implications of greenhouse warming, for example), but it occurs in non-scientific disputes as well. (For example, how many people will lose their jobs if the government adopts a new economic policy).”

Source: Conflict Research Consortium

“ Every firm deals with uncertainty in one way or another. Uncertainty is not often addressed very well in competitive strategy formulation.” - Michael Porter

“ Every firm deals with uncertainty in one way or another. Uncertainty is not often addressed very well in competitive strategy formulation.”

- Michael Porter

Event: Occurrence of something Outcome: Result or consequence of event Probability: The likelihood of an outcome Value at Risk: Amount of loss if a negative event happens

Event: Occurrence of something

Outcome: Result or consequence of event

Probability: The likelihood of an outcome

Value at Risk: Amount of loss if a negative event happens

Certainty, Risk & Uncertainty Certainty: This is a situation wherein the outcome that will occur is known. Risk: This is a situation wherein all possible outcomes and the probability of occurrence are known , even as one does not know which outcome shall surely occur. Uncertainty: This is a situation wherein the possible outcomes or probability of the outcomes is unknown, or both the possible outcomes and probability of outcomes are unknown.

Certainty: This is a situation wherein the outcome that will occur is known.

Risk: This is a situation wherein all possible outcomes and the probability of occurrence are known , even as one does not know which outcome shall surely occur.

Uncertainty: This is a situation wherein the possible outcomes or probability of the outcomes is unknown, or both the possible outcomes and probability of outcomes are unknown.

Positioning Uncertainty & Risk Uncertainty Risk and Uncertainty Risk Probabilities [and Outcomes] Unknown Some Knowledge Of Probabilities [and Outcomes] Probabilities [and Outcomes] Known Source: Casavant, Kenneth, Infanger and Bridges

Differentiating Risk from Uncertainty Risk is a state which probabilistic distributions can be assigned and expected values can be determined. In the case of uncertainty, probabilistic distribution can’t be assigned and expected values can’t be determined

Risk is a state which probabilistic distributions can be assigned and expected values can be determined.

In the case of uncertainty, probabilistic distribution can’t be assigned and expected values can’t be determined

Exercise Mention 5 examples of Certainty Mention 5 examples of Risk Mention 5 examples of Uncertainty

Mention 5 examples of Certainty

Mention 5 examples of Risk

Mention 5 examples of Uncertainty

Impact of Risk and Uncertainty on Choices During Decision Making Lower risk and uncertainty are preferable situations: If the management of a firm fail to think about risk and uncertainty, it may end in quandary. As risk and uncertainty increases, some strategic choices become more valuable than others: At high levels of risk and uncertainty, the best strategic choices are those that boost an organisation’s flexibility and sustain open options.

Lower risk and uncertainty are preferable situations: If the management of a firm fail to think about risk and uncertainty, it may end in quandary.

As risk and uncertainty increases, some strategic choices become more valuable than others: At high levels of risk and uncertainty, the best strategic choices are those that boost an organisation’s flexibility and sustain open options.

“ Uncertainty confounds the planning process by invalidating the rules of the game under which the industry has operated, without revealing obvious new rules.” - Dennis Kennedy

“ Uncertainty confounds the planning process by invalidating the rules of the game under which the industry has operated, without revealing obvious new rules.”

- Dennis Kennedy

Sources of Uncertainty Source: Elijah Ezendu, Decision-Making

Demand Structure Customer Preferences Market Size Price Responsiveness Segmentation Externalities Industry Structure Government Regulation Influence of Non Governmental Organisations Social Norms

Customer Preferences

Market Size

Price Responsiveness

Segmentation

Industry Structure

Government Regulation

Influence of Non Governmental Organisations

Social Norms

Supply Structure New Products New Processes New Technology Competitors Nature of Competitors Strategies of Competitors Behaviours of Competitors

New Products

New Processes

New Technology

Nature of Competitors

Strategies of Competitors

Behaviours of Competitors

Internal Forces Alignment of Ownership Behaviour of Management Behaviour of Employees Time The Rapidity of a Phenomenon

Alignment of Ownership

Behaviour of Management

Behaviour of Employees

The Rapidity of a Phenomenon

“ Whether it is uncertainty, risk, or somewhere in-between there is one strategy that always improves the manager’s ability to make sound management decisions and that is information. The more information a manager has on the potential uncertainties and risks that they face, then the more they can establish probabilities of likely outcomes, evaluate the impact on the business, and evaluate risk management strategies accordingly.” - Kevin Bernhardt

“ Whether it is uncertainty, risk, or somewhere in-between there is one strategy that always improves the manager’s ability to make sound management decisions and that is information. The more information a manager has on the potential uncertainties and risks that they face, then the more they can establish probabilities of likely outcomes, evaluate the impact on the business, and evaluate risk management strategies accordingly.”

- Kevin Bernhardt

Levels of Uncertainty

Clear Trends These are factors that are plain and can be investigated without problems, and their details are knowable, while the activities can be predictable on probing deeper therein. For example assumptions about upward trend in the society, market and economic bloc.

These are factors that are plain and can be investigated without problems, and their details are knowable, while the activities can be predictable on probing deeper therein.

For example assumptions about upward trend in the society, market and economic bloc.

Unknowns That Are Known This second level of uncertainty is characterized by factors which when subjected to proper analysis , their probability of outcome can be known. For example demand trends and consumer preferences.

This second level of uncertainty is characterized by factors which when subjected to proper analysis , their probability of outcome can be known.

For example demand trends and consumer preferences.

Residual Uncertainty This is the topmost level of uncertainty and its distinctive features are complexity and futility in every attempt of people to conduct analysis for predicting occurrence. Therefore, residual uncertainty normally cause fear, stress and discomfort to decision makers. Nevertheless, movement from one position of time to another, may be able to downgrade it to a lower level of uncertainty. For example the effect of consumer choice on the future of financial services

This is the topmost level of uncertainty and its distinctive features are complexity and futility in every attempt of people to conduct analysis for predicting occurrence. Therefore, residual uncertainty normally cause fear, stress and discomfort to decision makers. Nevertheless, movement from one position of time to another, may be able to downgrade it to a lower level of uncertainty.

For example the effect of consumer choice on the future of financial services

Exercise As a forward looking professional, conduct a comprehensive profile of your career and pinpoint your goals. Thereafter, identify your career certainties, career risks and career uncertainties.

As a forward looking professional, conduct a comprehensive profile of your career and pinpoint your goals. Thereafter, identify your career certainties, career risks and career uncertainties.

Bernoulli’s Model of Different Risk Perspectives Source: Begg, Bratvold and Campbell, Decision-Making Under Uncertainty Risk-Averse Risk Neutral Risk-Seeking Utility Money

Risk-Averse: This involves preference for a certain outcome instead of a gamble with expected value of wealth. When a Risk-Averse decision-maker acts, a risky opportunity would be exchanged for one that has a definite outcome. This is characterized by diminishing marginal utility of wealth. Risk Neutral: This is indifferent between the certain outcome and gamble. The Risk Neutral attitude to decision-making focuses on expected value. Risk-Seeking: This involves preference for the gamble instead of the certain outcome. Risk-Seeking decision-maker would want to be paid an amount higher than the expected value, so as to exchange the risky decision for the certain one. This is characterized by increasing marginal utility of wealth. Risk Perspectives in Decision Making

Risk-Averse: This involves preference for a certain outcome instead of a gamble with expected value of wealth. When a Risk-Averse decision-maker acts, a risky opportunity would be exchanged for one that has a definite outcome. This is characterized by diminishing marginal utility of wealth.

Risk Neutral: This is indifferent between the certain outcome and gamble. The Risk Neutral attitude to decision-making focuses on expected value.

Risk-Seeking: This involves preference for the gamble instead of the certain outcome. Risk-Seeking decision-maker would want to be paid an amount higher than the expected value, so as to exchange the risky decision for the certain one. This is characterized by increasing marginal utility of wealth.

“ Most decisions to do something positive…. Can only be taken as a result of animal spirits- of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” - John Maynard Keynes

“ Most decisions to do something positive…. Can only be taken as a result of animal spirits- of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

- John Maynard Keynes

Common Biases Hindering Effective Management of Decisions Availability Bias Undue Optimism and Overconfidence Seeing Object of Belief Anchoring on Idea

Availability Bias

Undue Optimism and Overconfidence

Seeing Object of Belief

Anchoring on Idea

Handling Uncertainties Exogenous Uncertainty Identify technological uncertainties and ascertain market potential Limit the firm’s exposure Uphold flexibility Endogenous Uncertainty Identify optimal entry time with reference to competitor entry Build internal teams and alliance relationships.

Exogenous Uncertainty

Identify technological uncertainties and ascertain market potential

Limit the firm’s exposure

Uphold flexibility

Endogenous Uncertainty

Identify optimal entry time with reference to competitor entry

Build internal teams and alliance relationships.

Limitations of Using NPV Analysis Under Uncertainties Information pertaining to cash flow may not be available. Assumes uncertainty and risk remains constant It does not track the value of future strategies that are enabled by current strategy

Information pertaining to cash flow may not be available.

Assumes uncertainty and risk remains constant

It does not track the value of future strategies that are enabled by current strategy

The Place of Scenario Analysis in Managing Decision Under Uncertainties It gives room for alternative values of strategies based on alternative contributory factors It does not handle the second and third limitation of NPV Analysis

It gives room for alternative values of strategies based on alternative contributory factors

It does not handle the second and third limitation of NPV Analysis

Limitations of Real Options in Managing Decision Under Uncertainty The problem of balancing flexibility with commitment Variation in responsiveness of products/opportunities to capital market assumptions

The problem of balancing flexibility with commitment

Variation in responsiveness of products/opportunities to capital market assumptions

Flexibility Versus Commitment When commitment become successful, it gives superior performance Flexibility to go for additional options could be connected to previous commitment Even if the value of flexibility is increased by uncertainty, obviously it’s not right to be totally flexible.

When commitment become successful, it gives superior performance

Flexibility to go for additional options could be connected to previous commitment

Even if the value of flexibility is increased by uncertainty, obviously it’s not right to be totally flexible.

Decision Profiling This is done by identifying and examining the past choices and their basis in line with standards , so as to ensure compliance of decision thrust to stated objectives.

This is done by identifying and examining the past choices and their basis in line with standards , so as to ensure compliance of decision thrust to stated objectives.

Case Study The Chief Executive Officer of Kestel Bank invited you as a consultant to conduct management decision profiling, so as to ascertain the veracity of their decision thrust in improving competitiveness. Explain how you would conduct it vis-à-vis the internal and external realities of the bank.

The Chief Executive Officer of Kestel Bank invited you as a consultant to conduct management decision profiling, so as to ascertain the veracity of their decision thrust in improving competitiveness. Explain how you would conduct it vis-à-vis the internal and external realities of the bank.

Dr. Elijah Ezendu is a multidisciplinary professional whose business experience mounts through diverse fields. He is a Certified Management Consultant, licensed by International Council of Management Consulting Institutes which has a Special Consultative Status in United Nations Economic and Social Council. As a result of his strides in management consulting, he received Merit Award for Excellence in Consulting. He is concurrently Senior Partner, Shevach Consulting; Director of Strategy and Performance, Fortuna; Lead Assessor and Member of Governing Council, Institute of Management Consultants; Director of Training, International Council of Business Development Professionals; Member of Marketing Committee, International Council of Management Consulting Institutes; Honorary Global Advisor, International Project Management Commission; and Programme Coordinator (Nigeria), Regent Business School, South Africa. He holds a doctoral degree in Management from St. Clements University, British West Indies. He is a Chartered Manager certified by Canadian Institute of Management, Canada and holds numerous professional qualifications including Master Project Manager; Project Manager E-Business; Fellow, Institute of Management Consultants; Fellow, Certified Institute of Cost Management; Fellow, Institute of Business Development; Fellow, American Academy of Financial Management; Fellow, Institute of Internal Auditors; Member, Nigerian Institute of Training and Development; Member, Institute of Analytics Professionals; Associate, Chartered Institute of Personnel Management of Nigeria; Associate, Chartered Institute of Arbitrators (Nigeria). He is a Certified Business Development Analyst and Competitive Intelligence Professional. Additionally, he is an information technology management professional certified by Institute for the Management of Information Systems, UK along with Microsoft Corporation, USA and stands as a Member of International Association of Software Architects. He is an outstanding motivational speaker with a knack for recalibration of positive influence; and a world-class consultant, who has functioned as Speaker/Facilitator at myriad programmes of professional institutes, international development organisations, private and public firms including extra-governmental agencies and institutions. He is a prolific writer and author who had served as Editor-in-Chief, Cost Management Journal; Part-Time Lecturer & External Examiner (MBA Programme), Ladoke Akintola University of Technology; Director of MBA Programme (Nigerian Outreach), Management Institute of Canada; Chief Operating Officer, Rohan Marine; Second Vice President and Member of Governing Council, Certified Institute of Cost Management; Director of Programmes and Member of Governing Council, The Institute of Business Development; Director, Refined Shipping; and Examiner to various Professional Institutes.

Dr. Elijah Ezendu is a multidisciplinary professional whose business experience mounts through diverse fields. He is a Certified Management Consultant, licensed by International Council of Management Consulting Institutes which has a Special Consultative Status in United Nations Economic and Social Council. As a result of his strides in management consulting, he received Merit Award for Excellence in Consulting. He is concurrently Senior Partner, Shevach Consulting; Director of Strategy and Performance, Fortuna; Lead Assessor and Member of Governing Council, Institute of Management Consultants; Director of Training, International Council of Business Development Professionals; Member of Marketing Committee, International Council of Management Consulting Institutes; Honorary Global Advisor, International Project Management Commission; and Programme Coordinator (Nigeria), Regent Business School, South Africa. He holds a doctoral degree in Management from St. Clements University, British West Indies. He is a Chartered Manager certified by Canadian Institute of Management, Canada and holds numerous professional qualifications including Master Project Manager; Project Manager E-Business; Fellow, Institute of Management Consultants; Fellow, Certified Institute of Cost Management; Fellow, Institute of Business Development; Fellow, American Academy of Financial Management; Fellow, Institute of Internal Auditors; Member, Nigerian Institute of Training and Development; Member, Institute of Analytics Professionals; Associate, Chartered Institute of Personnel Management of Nigeria; Associate, Chartered Institute of Arbitrators (Nigeria). He is a Certified Business Development Analyst and Competitive Intelligence Professional. Additionally, he is an information technology management professional certified by Institute for the Management of Information Systems, UK along with Microsoft Corporation, USA and stands as a Member of International Association of Software Architects. He is an outstanding motivational speaker with a knack for recalibration of positive influence; and a world-class consultant, who has functioned as Speaker/Facilitator at myriad programmes of professional institutes, international development organisations, private and public firms including extra-governmental agencies and institutions. He is a prolific writer and author who had served as Editor-in-Chief, Cost Management Journal; Part-Time Lecturer & External Examiner (MBA Programme), Ladoke Akintola University of Technology; Director of MBA Programme (Nigerian Outreach), Management Institute of Canada; Chief Operating Officer, Rohan Marine; Second Vice President and Member of Governing Council, Certified Institute of Cost Management; Director of Programmes and Member of Governing Council, The Institute of Business Development; Director, Refined Shipping; and Examiner to various Professional Institutes.

Merci Beaucoup For additional information: Dr. Elijah Ezendu elezendu@yahoo.com, 234 8033024596, 234 8058835237