Decision making is an essential part of any business organization. The environment in which decisions are made can significantly affect the outcome of the decision. There are three types of decision making environments, namely certainty, uncertainty, and risk. In this article, we will discuss each of these environments in detail.
Types of Decision Making Environments
| Decision Making Environment | Event Types | Probability | Examples |
|---|---|---|---|
| Certainty | One | 100% | Employee Attendance, Office Supplies |
| Uncertainty | Multiple | Unknown | Market Demand, Competitors’ Moves |
| Risk | Multiple | Known | Investment Decisions, Production Planning |
1. Certainty
In a certainty environment, there is only one type of event that can take place, and the decision maker can predict the outcome with complete certainty. However, such decisions are of little significance to the success of the business.
Examples of certain decisions are routine tasks such as employee attendance, office supplies, etc.
2. Uncertainty
In an uncertain environment, the decision maker is completely in the dark regarding the event that is likely to take place. More than one type of event can take place, and the decision maker cannot assign probabilities to the occurrence of each event.
Such situations arise when the event is determined by external factors like market demand, competitors’ moves, etc. The decision maker has limited control over such factors.
3. Risk
In a risk environment, the decision maker has adequate information to assign probabilities to the happening or non-happening of each possible event. There are more than one possible events that can take place, and the probabilities are based on past experience.
Most business decisions fall under this category, and new tools like risk analysis, decision trees, and preference theory are used to analyze such situations.
Conclusion of Decision Making Environment Types
Understanding the type of decision making environment is crucial for making effective business decisions. While certainty is rare, uncertainty and risk are common. By using various tools and techniques, decision makers can analyze and make decisions even under conditions of uncertainty and risk.