Volume 20, Number 2 Article by Anand Bhaskaran, Rahul Parihar and Srinivas Prakhya June, 2008
Approaches to Decision Making Under Uncertainty :
Choice in uncertain environments and decision making under uncertainty is a central theme in many of the disciplines that are synthesised in management curriculums. Organisations worry about environmental uncertainty and adapting to change. Anand Bhaskaran, Rahul Parihar and Srinivas Prakhya present a teaching plan to aid classroom discussions with graduate and doctoral students on decision making under uncertainty.
The first part of the article discusses two possible approaches to decision making under uncertainty – optimising and satisficing — in the context of an investment decision. After outlining the basic concepts underlying the two approaches, the authors apply them to an investment in a pension scheme which would involve choice of product and of brand. The task is presented numerically using an Excel tool, to enable active learning. Of the two approaches, the optimising approach, based on concepts of expected utility, is rigorous and elegant but demanding in cognitive effort and does not always reflect actual behaviour. Its critics focus on its unrealistic assumptions about human analytic capabilities and its inadequate predictive ability. The satisficing approach, which is based on Herbert Simon’s bounded rationality paradigm, offers a compelling alternative, but it is not generic and may need to be operationalised on a case specific basis. In the second part of the article, the authors explore the implications of choice set size for decision making approaches under uncertainty. An experiment where participants are asked to make a choice between the two approaches after having familiarised themselves with both, is described and the results are discussed. The note can be used in the classroom, in conjunction with standard texts, to facilitate a discussion on any management decision.
Reprint No 08207
