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Managing Decision Under Uncertainties


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Understanding the effects of uncertainties on determinants of appropriate decision.

Published in: Business, Economy & Finance
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Managing Decision Under Uncertainties

  1. 1. Managing Decision Under Uncertainties Dr. Elijah Ezendu FIMC, FIIAN, FBDI, FSSM, FAAFM, FCCM, MIMIS, MITD, ACIArb, ACIPM, PhD, DocM, MBA, CWM, CBDA, CMA, MPM, PME, CSOL, CCIP, CMC, CMgr
  2. 2. 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
  3. 3. “Decisions under uncertainty are high-stakes gambling where factors such as human life, health, economic prosperity, or the environment are concerned.” - Norman Shultz
  4. 4. “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
  5. 5. “Every firm deals with uncertainty in one way or another. Uncertainty is not often addressed very well in competitive strategy formulation.” - Michael Porter
  6. 6. 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
  7. 7. 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.
  8. 8. 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
  9. 9. 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
  10. 10. Exercise 1. Mention 5 examples of Certainty 2. Mention 5 examples of Risk 3. Mention 5 examples of Uncertainty
  11. 11. 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.
  12. 12. “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
  13. 13. Sources of Uncertainty Source: Elijah Ezendu, Decision-Making
  14. 14. Demand Structure • Customer Preferences • Market Size • Price Responsiveness • Segmentation Externalities • Industry Structure • Government Regulation • Influence of Non Governmental Organisations • Social Norms
  15. 15. Supply Structure • New Products • New Processes • New Technology Competitors • Nature of Competitors • Strategies of Competitors • Behaviours of Competitors
  16. 16. Internal Forces • Alignment of Ownership • Behaviour of Management • Behaviour of Employees Time • The Rapidity of a Phenomenon
  17. 17. “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
  18. 18. Levels of Uncertainty
  19. 19. 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.
  20. 20. 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.
  21. 21. 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
  22. 22. 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.
  23. 23. Bernoulli’s Model of Different Risk Perspectives Risk-Averse Risk Neutral Risk-Seeking Utility Money Source: Begg, Bratvold and Campbell, Decision-Making Under Uncertainty
  24. 24. i. 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. ii. Risk Neutral: This is indifferent between the certain outcome and gamble. The Risk Neutral attitude to decision- making focuses on expected value. iii. 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
  25. 25. “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
  26. 26. Common Biases Hindering Effective Management of Decisions • Availability Bias • Undue Optimism and Overconfidence • Seeing Object of Belief • Anchoring on Idea
  27. 27. 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.
  28. 28. Limitations of Using NPV Analysis Under Uncertainties 1. Information pertaining to cash flow may not be available. 2. Assumes uncertainty and risk remains constant 3. It does not track the value of future strategies that are enabled by current strategy
  29. 29. 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
  30. 30. Limitations of Real Options in Managing Decision Under Uncertainty 1. The problem of balancing flexibility with commitment 2. Variation in responsiveness of products/opportunities to capital market assumptions
  31. 31. Flexibility Versus Commitment 1. When commitment become successful, it gives superior performance 2. Flexibility to go for additional options could be connected to previous commitment 3. Even if the value of flexibility is increased by uncertainty, obviously it’s not right to be totally flexible.
  32. 32. 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.
  33. 33. 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.
  34. 34. Dr Elijah Ezendu is Award-Winning Business Expert & Certified Management Consultant with expertise in Interim Management, Strategy, Competitive Intelligence, Transformation, Restructuring, Turnaround Management, Business Development, Marketing, Project & Cost Management, Leadership, HR, CSR, e- Business & Software Architecture. He had functioned as Founder, Initiative for Sustainable Business Equity; Chairman of Board, Charisma Broadcast Film Academy; Group Chief Operating Officer, Idova Group; CEO, Rubiini (UAE); Special Advisor, RTEAN; Director, MMNA Investments; Chair, Int’l Board of GCC Business Council (UAE); Senior Partner, Shevach Consulting; Chairman (Certification & Training), Coordinator (Board of Fellows), Lead Assessor & Governing Council Member, Institute of Management Consultants, Nigeria; Lead Resource, Centre for Competitive Intelligence Development; Lead Consultant/ Partner, JK Michaels; Turnaround Project Director, Consolidated Business Holdings Limited; Technical Director, Gestalt; Chief Operating Officer, Rohan Group; Executive Director (Various Roles), Fortuna, Gambia & Malta; Chief Advisor/ Partner, D & E; Vice Chairman of Board, Refined Shipping; Director of Programmes & Governing Council Member, Institute of Business Development, Nigeria; Member of TDD Committee, International Association of Software Architects, USA; Member of Strategic Planning and Implementation Committee, Chartered Institute of Personnel Management of Nigeria; Country Manager (Nigeria) & Adjunct Faculty (MBA Programme), Regent Business School, South Africa; Adjunct Faculty (MBA Programme), Ladoke Akintola University of Technology; Editor-in-Chief, Cost Management Journal; Council Member, Institute of Internal Auditors of Nigeria; Member, Board of Directors (Several Organizations). He holds Doctoral Degree in Management, Master of Business Administration and Fellow of Professional Institutes in North America, UK & Nigeria. He is Innovator of Corporate Investment Structure Based on Financials and Intangibles, for valuation highlighting intangible contributions of host communities and ecological environment: A model celebrated globally as remedy for unmitigated depreciation of ecological capital and developmental deprivation of host communities. He had served as Examiner to Professional Institutes and Universities. He had been a member of Guild of Soundtrack Producers of Nigeria. He's an author and extensively featured speaker.
  35. 35. Thank You