Decision Making for Managers: Certainty, Risk & Uncertainty

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  • 0:05 What Is Certain
  • 0:37 Weighing Risk
  • 1:33 Several Perspectives
  • 4:31 Lesson Summary
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Lesson Transcript
Instructor: Rob Wengrzyn
Making decisions with the most amount of certainty is something managers learn to do over time. In this lesson, we will review how managers work with certainty and risk in order to make informed decisions.

What Is Certain

Is there really anything in this world that's certain besides death and taxes? Probably not. While I can believe some things will happen or occur with more certainty than others, if someone were to ask me 'Are you 100% certain?' I would have to tell them no. Managers, unfortunately, are in the same position. Equally unfortunate is when a boss is breathing down your neck for an answer and wants 'certainty' that the results will be what he or she is expecting. Welcome to the lovely world of managers and risk assessment.

Weighing Risk

When we talk about certainty, we are really talking about weighing risk: looking at the situation at hand, defining all the variables and issues that are present in that situation and weighing the risk against the uncertainty of the outcome.

That is not an easy position for anyone to be in, but the more you are in it, and the more you go through it, the better you get at understanding it.

For example, let us say that your boss comes to you and says 'Jenkins, we need to build a new plant and we need it in the best place possible. Research the markets and make sure you put the plant in the right place.'

Wow, Jenkins' boss sure threw a tough one at him. Now, it is apparent Mr. Jenkins is going to have some uncertainty about exactly where this plant should go, and he obviously does not want to make a mistake. Certainty, risk and uncertainty are thus going to impact his decision-making process (along with the fact that his boss is breathing down his neck for the right decision).

Several Perspectives

Really, Mr. Jenkins can look at this from a few different perspectives:

  1. Is he making a decision based on complete uncertainty? Does he have no idea what he's looking for or what to look out for?
  2. Is he making a decision based purely on weighing the risks involved? In other words, does he have a fairly good handle on the issue but is trying to understand all the risks that could occur?
  3. Is he certain he knows what to do and will go ahead and do it? In other words, is he trusting what he knows and not doing any research? This can be as risky as anything else, and we'll talk about that in a little bit.

If Mr. Jenkins is making this decision out of complete uncertainty, he does not have a lot of options but to do a lot of research.

The trick is knowing what to research and where to look. He has to make sure he is reviewing the right criteria - for example, this might be city and state tax rates, roadways that can lead to the plant and how good or bad they are and the available employee pool in a specific location.

Or maybe Mr. Jenkins is making a decision based purely on weighing the risks involved. To be honest, there is risk in every decision. Therefore Mr. Jenkins not only has to identify the risk but also understand the likelihood of that risk actually happening - and what he could do to address it if it did happen.

For example, if he wanted to put the new plant in California, he'd have to consider earthquakes - how often do they occur and in what areas? While earthquakes are a definite risk, he would have to think about what the company could do about them if they did happen. To make decisions based on weighing risks, these are the kinds of issues that Mr. Jenkins will have to look at.

The biggest mistake Mr. Jenkins can make is to have a sense of certainty and not look at any risk.

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