Risk, uncertainty and probabilistic decision making in an increasingly volatile world

Abstract

This article aims to ascertain the extent to which probabilistic decision making can enable managers to make crucial decisions in a world of uncertainty associated with globalization. Existing evidence suggests that probabilistic decision making can be deployed for risk management purposes if two conditions are satisfied: the decision maker must be aware of a complete list of possible future events; and the decision maker must be able to revise his/her expectations in the light of new information about such events. This article demonstrates that the satisfaction of these conditions requires a sound understanding of the sources of risks, quantifying those risks, and assessing the probability associated with each. To ensure that these conditions are satisfied, a risk management strategy must aim to maximize the amount of information that will be available at the time of taking the decision rather than wait to learn from outcomes. Outcomes‐based justification of decisions may no longer be an effective decision‐making strategy because the stakes involved, i.e. the risks and opportunities associated with globalization, are too high. An information‐driven, proactive decision‐making strategy requires higher levels of information pooling and exchange within companies.

Citation

Ugur, M. (2005), "Risk, uncertainty and probabilistic decision making in an increasingly volatile world", Handbook of Business Strategy, Vol. 6 No. 1, pp. 19-24. https://doi.org/10.1108/08944310510556900