Making Decisions in Situations of Uncertainty

One of the most interesting issues in the topic we are discussing is the ability to make decisions in situations of uncertainty. And when the uncertainty is accompanied by lack of information then there is also great importance in the ability of a person to make the right decisions. It is obvious that the more accurate and relevant the information received by the decision-maker then the more their ability to make the right, professional, decision improves. This is one of the reasons why a doctor providing a Second Opinion will more likely do better than the doctor who gave the first opinion: the second doctor can learn from the mistakes of the first, having the important information from the test results and knowing what should or should not be done and which of the tests turned out to be insufficient.

Making decisions in situations of uncertainty is one of the basic managerial activities required from any manager. Actually, almost every person is required at one time or another to make decisions in situations of uncertainty. There are, of course, situations in which the decision is not necessarily dichotomous (meaning – all or nothing) but is flexible and can be changed. A couple who wish to check their compatibility for living together can move in together for a trial period, assuming their behaviour during the marriage will be similar to their behaviour before the marriage. Deciding on an educational path, which is undoubtedly made in a situation of uncertainty, may include an ‘escape route’ to other directions or fields after a few months or years of studying, although such an ‘escape’ has a price.

In the field of entrepreneurship, there may be situations in which an investor makes a decision to distribute the risk and for that purpose will use a venture capital fund of which they are part owner, or possibly to bring in an additional person for this particular investment, and thus by doing so decrease the potential damage to them in case the start-up fails.

Are there decisions, made in situations of uncertainty, which do not have escape routes? In any dichotomous decision of ‘all or nothing’ there is a very high level of risk. Naturally, a decision-maker can minimize the risk by performing a series of tests. By the way, the interesting thing is that there are situations in which performing the tests only increases the uncertainty about the decision that should be made and the ability to make the decision decreases according to the findings. It is similar to a situation in which parents must decide which kindergarten they would like to send their child to. The in-depth survey they perform about kindergartens in their area could teach the head of the FBI or CIA how to conduct an investigation, but eventually they decide to send their child to the kindergarten that is closest to their home. In the last few months of pregnancy almost every mother-to-be surveys the hospitals in her area towards the upcoming birth. Can an early visit predict the reality she will be in during the birth? Is the number of questions a woman in her first pregnancy asks her doctors higher than the number of questions asked by a woman in her second or third pregnancy? Do these questions actually decrease the uncertainty? The answer is not as clear and unequivocal as it seems at first.

Making decisions in situations of uncertainty requires a sort of gamble. Even when trying to minimize the gamble and the uncertainty, we are still left with a small framework (more or less) that holds an element of uncertainty. The credit-control manager of a car lease company can easily approve a credit request of a quarter of a million dollars for a large banking firm. It is much more difficult to approve a 30 thousand dollar request for a newly established company with unknown shareholders operating in a problematic business environment. The credit controller will ask such a company for its financial reports will inquire with other suppliers and, finally, when the approval is signed – it will still be a type of gamble. It is definitely not a full-scale gamble (like the lottery), but an educated gamble made based on knowhow and experience, and yet it is still a gamble of sorts. Is every decision made in situations of uncertainty a sort of gamble? The answer is, probably, yes, but it is the decision makers' duty to minimize the gamble as much as possible. It is, in fact, their responsibility. By the way, there are situations in which the gamble is benign (the lottery) and situations in which the gamble is malignant (crossing the road without looking or changing lanes during driving without signalling). The ‘basic gamble’ is the same in both cases, the difference is that in one case a person spends a few dollars on a lottery ticket that gives them a (slim) chance of winning millions and in the other case the pedestrian the does not look left and right may be run over and the driver who failed to signal can cause a deadly accident.

Is every investor a gambler? Is every entrepreneur a gambler? It is quite possible that the answer to these is “yes”, but they are gamblers who are trying to decrease their risks and to increase their chances using various methods of filtering dangers and identifying opportunities they created for themselves. This means that they will still make decisions in situations of uncertainty, but this uncertainty can decrease over time.

Making decisions in conditions of uncertainty is joined by another, no less important, component – the flexibility required to change the decision if needed. If a certain decision is made and over time must be changed, then one must be flexible (if possible) and change the decision according to the new conditions. It may not always be possible to change the decision but mostly the real difficulty is due to ego problems or misconceptions. For example, if decision-makers are enamoured with the decision they made, even if it is wrong and information received from the field shows that it must be changed, they will not do a thing to change it. This brings in another aspect – the ability to admit that a mistake was made. Because if we change our decision, that means that the former decision we made was wrong. This means that a change in the decision proves that the person or entity that made it was mistaken.

The principle of ‘the herd’ has an undeniable influence on decision-makers in situations of uncertainty. If everyone is on the stock market, the decision-maker thinks, I should be there too. If everyone is getting a Japanese car, I should have one too. If everyone – then me too. The principle of ‘the herd’ was not invented in a particular country and is no more developed than in the next country. Even early on at school we can see how the ‘popular’ kids can influence the way all of the other kids dress to school. A very popular game in high school can cost parents large amounts of money per month just because "everyone else already has it".

When discussing functioning and behaviour in situations of uncertainty, and focusing on decision-making in such situations, we cannot avoid the basic question of the effects of peer pressure on the decision-makers. Whoever tries to minimize this pressure will find that it is nearly impossible to do so. An advertising campaign for a brand of air-conditioners I once saw displayed a crowd of people shouting out the name of the brand together. This is also the type of ‘brain-washing’ displayed on many other campaigns and commercials. All of these are aimed to influence decision makers to choose a certain product, subconsciously, by turning the decision making process into a less educated and more emotional one.

To what extent is this expressed in the entrepreneurship world, in the business world and in the world of financial investments and business partnerships? There is no doubt that every businessperson makes decisions in situations of uncertainty. The question that will always remain open pertains to the level of uncertainty. Uncertainty is certain, but the level of uncertainty is the main variable. Every decision in the business world that does not deal with what happens in the next hour or the arrival of the next day is based on uncertainty.