The work of the leader is connected with the need to constantly make decisions, they affect the success of the company, its future and stability. But, in addition to responsibility, the situation in the company, in the market, in the world also affects this process, and these indicators, as you know, are characterized by high variability and dynamics. Therefore, the development of managerial decisions in the face of uncertainty is a complex, multifaceted process. We will tell about its specifics, about what methods and criteria the manager has in making such decisions.
The concept of uncertainty and risk
Before making any decisions, it is common for people to assess the consequences, to think over all suitable options so as not to make mistakes. And in the field of management, these assessments of the situation are becoming critically important. After all, management mistakes can cause serious damage to the business and even lead to its collapse. And modern enterprises are developing in a very dynamic environment. Therefore, decision-making in conditions of uncertainty and risk is no longer something rare and out of the ordinary, but the daily activities of managers.
Under the uncertainty understand the incompleteness or poor quality of information about the situation in which it is necessary to solve a particular problem. The source of uncertainty can be the behavior of market participants, factors of the external and internal environment, technical processes. Uncertainty usually manifests itself in relation to the various conditions in which a decision is made. Risks are potential dangers of a negative decision. It arises from the environment in which the production activity takes place, as well as from the features of the process in which the decision is made.
Ways to assess potential hazards
In order to overcome the difficulty of making decisions in the face of uncertainty, it is necessary to skillfully assess the risks and possible consequences. There are many methods for assessing a potential threat to a business. Usually they are divided into qualitative and quantitative methods. In the group of qualitative methods, ratings, ranking, and a point mark are distinguished. And quantitative methods include those based on probability theory and mathematical statistics. However, in practice, managers rarely resort to the use of scientific assessment methods, preferring to rely on their own experience, expert judgment, and statistical data. Managers strive to understand how high the degree of risk is, and make decisions on this basis. And they often build this understanding on the subjective perception of the situation, which can lead to an increase in the percentage of erroneous decisions.
Types of Risks and Uncertainties
The process of developing solutions in the face of uncertainty may vary depending on what risks are expected. There are several classifications of possible risks in management.
By the nature of the threat, the following risks are distinguished:
- natural, emanating from the natural environment and not dependent on humans, for example, a tsunami or a hurricane;
- technogenic, associated with human activities and failures in various artificial systems, for example, violation of the ecological balance;
- mixed, in which the two previous species are combined, for example, an avalanche caused by human activity.
In areas affected by risks, they are divided into:
- social;
- political;
- commercial;
- environmental;
- professional.
Also distinguish internal and external, simple and complex, permanent and temporary, insured and uninsured. According to the frequency of occurrence, high, medium and small risks are distinguished.
In the commercial sphere, risks are usually identified:
- leading to economic losses;
- associated with lost profits;
- those that, under different circumstances, lead either to economic damage or to receive additional profit.
There are also classifications of uncertainty: they distinguish promising and retrospective varieties. There is also uncertainty associated with nature, accuracy of goals, a linguistic description of the situation, conditions of existence. Such a wide variety of dangers and threats leads to the fact that decision making in conditions of uncertainty and risk is extremely complicated.
Concept of management decision
In management, a solution is understood in two meanings: as a process and as a result. The process includes 8 main steps:
- collection of information;
- preparation of alternatives;
- coordination of options;
- choosing the most suitable of them;
- statement;
- implementation;
- control over the execution of the decision;
- evaluation of the results.
When making decisions in conditions of uncertainty and risk, particular importance is attached to the first two stages, since it is necessary to minimize threats.
The solution is characterized by a number of requirements, these include:
- feasibility - there must necessarily be an opportunity to bring it to life;
- relevance - they should meet the requirements of the moment as much as possible;
- optimality - the implementation of the solution must meet the condition of the balance of resources spent and benefits obtained;
- legality - any decision must be legitimate;
- Consistency - execution of a decision should not cause a conflict of interests of performers;
- limited time - the implementation of the solution should have a specific time horizon;
- simplicity, clarity and brevity of presentation - so that the performers do not have difficulty in implementing the solution, they must understand it well.
Types of Solutions
Due to the wide variety of tasks facing any manager, there are many varieties of solutions.
They may differ in:
- Predictability of occurrence. Programmed and unprogrammed solutions are highlighted. The second is often associated with solving problems in the face of uncertainty and risk.
- Methods of adoption. You can discover intuitive, rational, science-based solutions.
- The scale of the consequences. Allocate general and particular solutions.
- Goals. Decisions are divided into strategic, tactical and operational.
- Directivity. External and internal solutions are highlighted.
- Method of adoption. You can divide all decisions into individual and group.
- The degree of formalization of the adoption process. In this case, it is customary to talk about contour or algorithmic solutions. Within the framework of the first, only the general direction of activity, structured decisions, is outlined when a sequence of actions of performers is compiled. They practically do not imply the initiative of employees. Algorithmic decisions - this is the most tough option, when the performer is offered a non-alternative way of translating the decision into practice.
Decision making conditions
Management technologies are associated with the definition and assessment of all conditions that affect decisions. They may differ in origin, in this case they distinguish between macro and microenvironment conditions. Usually, external conditions cannot be corrected by the forces of the organization, and one has to adapt to them, and internal ones are subject to change.
Traditionally, management distinguishes such decision-making conditions: certainty, risk, uncertainty. By certainty, we understand the full awareness of the manager about the situation in which the solution will be implemented. In this case, you can calculate all the consequences, make forecasts, and such decisions are relatively easy to make. Uncertainty is a condition under which the manager does not have complete information and makes a decision based not on data, but on experience, expert advice, intuition. Risk is the most unfavorable condition for making a decision. In this case, the manager assumes responsibility for the consequences that the decision entails. However, management has gained certain methodological experience in solving problems associated with different types of risks.
Decisions and Risk
We can say that today almost any decision - everyday, managerial, political, is associated with risk. The modern world is becoming less predictable, and it is the macro environment’s risks: the number of natural and man-made disasters is increasing, the conditions for doing business are changing. Therefore, decisions in the face of uncertainty are already a familiar, routine routine of managers at various levels. Traditionally, risk can be classified by degree of predictability. There are certain risks that are all known in advance. In this case, it is customary to talk about the weighted average risk of the decision. The manager assesses the probability of a threat and in accordance with this solves the task. There are also uncertain risks that few people can predict. For example, no one makes a managerial decision, taking into account the possibility that alien creatures will attack the Earth. Risk is precisely the factor that makes the manager’s work so difficult and responsible.
Decision rules and criteria in conditions of uncertainty and risk
When deciding what to do in a given economic situation, the manager must first assess the likelihood of threats. This is the main criterion that allows you to find the optimal solution to the problem in conditions of uncertainty. Another criterion is the amount of risk. There are special methods for calculating it, based on complex mathematical calculations.
The basic rules for making complex decisions include the following:
- it is necessary to identify all kinds of factors affecting the execution of decisions, both objective and subjective in nature;
- a thorough analysis of the identified risk factors should be carried out;
- you need to evaluate the financial dimension of possible risks in order to justify the economic feasibility of the decision;
- it is necessary to determine the threshold of acceptable risk;
- in the execution of the decision, it is necessary to include actions to reduce or prevent the occurrence of risk.
In management, there are also several rules for making management decisions in the face of uncertainty: maxmin, maxmax, minimax. In both cases, the decision matrix is populated. In the maxmin rule, or the Waald criterion, one of all possible options is selected which, under the most adverse conditions, can bring maximum results. The manager assumes the worst-case scenario and the maximum possible gain in this situation. And in the second case, a solution is chosen that is directly opposite, that which will give the highest result under a favorable set of circumstances. Minimax is a rule in which priority is given to a decision that allows a possible risk, but it is also expected to be of great benefit.
The main provisions of the theory of risky decision-making
Management has developed a theory of decision making under uncertainty. The object of its study is a certain problem situation. The starting point of this theory is the postulate that there is no better solution. It always corresponds to a given situation and a given moment in time. Another postulate of this theory is that the development of solutions in the face of uncertainty and risk should be based on a comprehensive analysis of the context in which this solution will be implemented. And another postulate of this theory suggests that the decision-making process must obey an algorithm that allows you not to miss anything meaningful.
Risk-Based Decision Making Methods
Risk situations require the use of various methods that allow you to find the optimal solution to the problem problem. All decision-making methods under uncertainty are divided into three groups:
- Quantitative. This group of methods is based on a system of mathematical calculations. These can be probabilistic, statistical, and simulation models, as well as game theory, linear modeling, and dynamic programming. These methods usually require the use of software and hardware.
- Collective. This group of methods involves working together to develop a solution for a team of specialists. This type includes brainstorming methods, Delphi method, expert assessment method.
- Informal. These are methods that are not amenable to strict regulation; they are also called heuristic. In this case, the decision is made on the basis of some kind of internal reflections and conclusions.
These methods are associated with the ability to assess risks by specific criteria. These estimates are at the heart of the decision-making process.
Methods and criteria for finding solutions and answers to questions in the face of uncertainty
In the event that the risks are unclear and it is impossible to find the exact parameters for their assessment, methods such as:
- Building a goal tree. This method allows you to build a hierarchy of goals and determine priorities when solving a problem.
- A method of comparing alternatives. In this case, the decision process in conditions of uncertainty is reduced to the formulation of possible options, their assessment and comparison according to the given parameters.
- Scenario planning. In this case, action plans are designed in a particular scenario. Various experts and a large amount of expert and prognostic information are involved in creating the scenarios.
To develop a solution in a situation of uncertainty, various criteria can be used to find the optimal answer to the question. Such criteria include: maximin (pessimistic), minimax and maximax (optimistic), as well as the sum of various criteria.