Decision Making under Uncertainty - Case Study Example

Running Head: MANAGING UNDER UNCERTAINTY Decision Making under Uncertainty (Name) (Course) (University) Date of presentation: Lecturer: Decision Making under Uncertainty Summary of Observations Southern Equity is a medium sized financial services firm based in Australia. The company has two branches in the country and offers financial consultancy, investment, loans and saving facilities. During the global financial crisis of 2007/2010, the company’s business was severely affected. As a result of the crisis, the company’s share prices as well as revenues dropped drastically as investors liquidated their money and the debtors failed to service their loans. As such, Southern Equity was confronted with the imminent crisis of ensuring that its business does not go under, and that it does not lose more investors and customers. The company’s executive management had to make decisions on how to resolve this issue without causing further damages to the company’s business prospects. The decision making process involved all senior managers including the chief executive officer, finance manager, the HR manager and the head of marketing. One of the decisions reached was to lay off some workers so as to cut down rising operating expenses. This decision was however dropped on the grounds that its implementation could not add any significant value to the company’s business, which was already making losses. Two more important decisions were reached. The first decision was to seek a loan from a bank to service outstanding debts that were not being serviced. This could help the company make a steadfast return to its former financial position before the crisis. The second decision was to diversify the company’s investment portfolio. This decision could entail investing in various securities and economic sectors such as real estate, stocks and the forex market. The diversification decision was to be extended to social welfare. Under this consideration, the management agreed to focus on investing in projects that are capable of supporting the community in social, ethical and environmental issues. This decision was motivated by the fact that investing in social sustainability could bring the greatest value to the greatest number of people instead of generating private profits for just a few people. Analysis of the Decision Making Process Using the Bounded Rationality Theory Uncertainty is a common unavoidable factor in risk management decisions (Kahneman & Tversky, 2000). Business managers have to make decisions based on both certain and uncertain occurrences. A sound approach to decision making under uncertainty requires the decision maker to be rational in establishing the decision objectives, identifying alternatives and evaluating the alternatives with the set objectives (Postmes, Spears & Cihangir, 2001). More often than not, there are a lot of uncertainties in forecasting the outcome of an alternative more especially when the outcomes of the decision involve complex trade-offs between various variables. Such decisions can be highly risky because their outcomes may involve losses such as sub-optimal outcomes or losses. There are a number of theories and models that can be used to understand the decision making process under uncertainty. One of these theories is the bounded rationality theory, which provides that during the decision making process, the rationality of the decision maker is influenced by the amount of time available for decision making; the cognitive capabilities of their minds and the information they have (Blackhart & Kline, 2005). This theory is based on the reasoning that any decision making process should result in optimal outcomes, at least to the satisfaction of the decision maker. This theory can be applied to the situation at Southern Equity to understand how the company arrived at the decision it implemented and why it objected to the first decision. According to Triantaphyllou (2000) a variety of methods can be used to overcome the challenges that uncertain decisions pose to the decision maker. On one end of the continuum are the decision analysis and probabilistic risk methods. On the other end of the continuum are the ad hoc methods (those methods that have been developed specifically for the particular uncertain situation) and at times intuition. Unlike decision analysis and probabilistic methods, intuition and ad hoc methods are less likely to provide a sound basis for decision making (Blackhart & Kline, 2005). This is particularly the case in situations where potential losses would be distributed across several stakeholders, some of whom may not have had any input into the decision making process. Such situations require a rigorous and rational approach to the decision making process in order to reach at an outcome that protects the dignity of the decision maker and the interests of the stakeholders (Triantaphyllou, 2000). Undeniably, decision analysis and probabilistic risk methods are the most common and effective approaches for decision making under uncertainty. By dropping the initial decision of retrenching some workers, the Southern Equity’s management based its reasoning on the decision analysis method. The main goal of the decision making process was to help the company get out of the difficult financial situation it got into as a result of the global financial crisis. This decision was based on the utilitarian approach to decision making where decisions taken are weighed against their consequences on individual happiness and desired outcomes (Postmes, Spears & Cihangir, 2001). Accordingly retrenching workers could not contribute to these goals, considering that the company’s losses were too much to be offset by the workers’ salaries. This decision was, in fact, rational and was necessary under the circumstances because if the company lost some of its workers, it is highly likely that the competence of its staff could be compromised. As such, the company could not be able to deliver on its desired objectives. The decision to diversify the company’s investment portfolio was based on a rigorous probabilistic risk analysis process. According to Monahan (2000), diversification is one of the most successful methods for managing risks. A well diversified portfolio ensures high returns even during periods of uncertainties. In taking this decision, Southern Equity reasoned that if the company expanded the range of its investments, it had high chances of mitigating the financial crisis. In addition, this decision could enable the company to acquire more customers who could contribute to the company’s progressive growth. Therefore, this was a rational decision taken at a time when the company was in dire need of financial assistance. Lastly, the decision to seek a loan was considered because it could have both short term and long term impacts on the company’s business prospects. Personal Reflection on the Decision Making Process The ability to make an effective decision when faced with an uncertain situation is extremely important. When organizations make lousy decision, they reap failures, lost business opportunities and decreased competitive advantages (Chandra, Krovi & Rajagopalan, 2009). As a result of poor and hasty decisions, employees lose the morale to work to their optimum levels of productivity. Ideally, any good decision making process begins with identification of the problem. Once the problem is identified, it becomes easy to look for alternative solutions to the problem. If I were the one solving the problem at Southern Equity, I could handle the situation by first establishing the cause of the problem, its impact on the company and the consequences of different alternative solutions (Kahneman & Tversky, 2000). According to Beresford and Sloper (2008), there are two important strategies that can be used for effective decision making under uncertainty. These are: decision tree analysis and pay-off matrix. The decision tree technique involves evaluating a sequence of decisions to arrive at the most promising alterative. These decisions are usually represented in the form of a graph, which enables the decision maker to determine the expected values of the various decisions. This technique incorporates the principles of rationality in decision making and greatly enhances the ability of decision makers to evaluate alternative or competing decisions (Monahan, 2000). Decision tree analysis is ideal in situations where there are many decisions that need to be made in a series (Triantaphyllou, 2000). Regarding the situation at southern Equity, I could have used this technique to not only determine the best solution to be taken but also the likely consequences of each decision on the company’s business. The payoff matrix is another common technique that is used in rational decision making processes. This technique makes use of probability techniques in decision making and is ideal for use in situations where the probable values of each outcome are required. When using this technique for decision making, undesired situations with high chances of occurrence are avoided (Oliveira, 2007). For instance, it could be detrimental for the company to sack some of it workers because this could be an added cost to the company’s business. This technique was used by the company and it enabled it to implement decisions which saw the company make a quick comeback from the desperate financial situation it found itself in. Had the company not taken this decision, it is highly likely that its business could have been paralyzed as well as the interests of its stakeholders (Chandra, Krovi & Rajagopalan, 2009). In view of the above techniques, the best decision that I could have made is to seek external funding for the company. This is a highly rational decision, which could cater for the objectives of the company and the interests of all stakeholders including employees and investors. In conclusion, decisions made under situations of uncertainty should be very rational and sensitive to the interests of all concerned parties. References Beresford, B. and Sloper, T. (2008). Understanding the Dynamics of Decision-Making and Choice: A Scoping Study of Key Psychological Theories to Inform the Design and Analysis of the Panel Study. ISBN 978-1-871713-24-4. Blackhart, G. C. and Kline, J. P. (2005). "Individual differences in anterior EEG asymmetry between high and low defensive individuals during a rumination/distraction task". Personality and Individual Differences, 39(2), p. 427–437. Chandra, A., Krovi, R. & Rajagopalan, B. (2009). Risk Visualization: A mechanism for Supporting Unstructured decision Making Processes. The International Journal of applied management and Technology, 6(4), p. 48-70. Kahneman, D. and Tversky, A. (2000). Choice, Values, Frames. The Cambridge University Press.  Monahan, G. (2000). Management Decision Making. Cambridge: Cambridge University Press. pp. 33–40.  Oliveira, A. (2007). A Discussion of Rational and Psychological Decision-Making Theories and Models: The Search for a Cultural-Ethical Decision-Making Model. Electronic Journal of Business Ethics and Organization Studies. Vol. 12, No. 2, p. 23-78. Postmes, T., Spears, R. and Cihangir, S. (2001)."Quality of decision making and group norms". Journal of Personality and Social Psychology, 80(6), p. 918–930. Triantaphyllou, E. (2000). Multi-Criteria Decision Making: A Comparative Study. Dordrecht, The Netherlands: Kluwer Academic Publishers (now Springer). pp. 320.  Read More