Conditions Under Which Decisions Are Made Essay

In that way you already have measures in place knowing that should you be in an accident you will have an alternative transport whilst your car is being fixed. Also when you buy a TV, you are usually given one year guarantee and you can get more years at an extra cost. In this instance you know that should the year be over and you had added two years more, and your TV has a problem maybe in the second year, you can take it back as it will still be under guarantee because you would have added more years to cover it. Risk This is when individuals can define a problem, specify the probability of certain events, identify alternative solutions, and state the probability of each solution leading to the desired result. Like in the case of construction, the construction cost overrun risk has a possibility that during the design and construction phase, the actual project costs will exceed projected costs as a result of weather, supplier’s shortage, labour and subcontractor performance. In this case the probability that this will happen will be dependent on past weather records, and experience of the contractor. A decision is made under risk when a supervisor or superior can list all possibilities of outcomes with the decision that has been made and state the probability of each outcome. There are two types of probabilities, there is an objective probability whereby the supervisor or manager assigns probability based on experience or similar situations and there is a subjective probability whereby the supervisor or manager has little experience with a the decision made or no data at all. This type of probability is based on personal experience or gut feel. For example, a manager decides to spend R2500. 00 on a shoe advertisement believing there are three possible outcomes for the advertisement, a 30% chance the advertisement will have only a small effect on sales, a 50% chance of a moderate effect, and a 20% chance of a very large effect. This decision is made under risk because the manager can list each potential outcome and determine the probability of each outcome occurring. Uncertainty This is when an individual does not have the necessary information to assign probabilities to the outcomes of alternative solutions. In cases of uncertainty the alternative solutions and problems are both unclear. Uncertainty exists when a decision maker cannot list all possible outcomes and/or cannot assign probabilities to the various outcomes. When faced with uncertainty, a manager would know only the different decision options available and the different possible states of nature. The states of nature are the future events or conditions that can influence the final outcome or payoff of a decision but cannot be controlled or affected by the manager. An example of a decision made under uncertainty would be, for a company in South Africa to open a branch say in Zambia producing products that have never been sold in that country. In this instance the is uncertainty as to whether the product will sell or not because they are not sure how the people of that country will receive hence a lot of money will be put in that project.