Risk And Uncertainty In Decision Making – But is it possible that until now we haven’t really learned which actions are best for us?
Divided into several sections, this article provides a theoretical overview of electoral science, with the main goal of providing concrete tools that may be useful to readers. Although a few technical terms are inevitable, I have tried to explain these concepts clearly and concisely.
Risk And Uncertainty In Decision Making
If I have achieved my goal, this article will provide a theoretical basis that will shape our decision-making process. Concrete steps are being taken to transform situations full of uncertainty into manageable situations that allow us to know the best course of action.
The Treatment Of Uncertainty And Risk In Decision Making
Along with the attraction of gambling or flashy entertainment, the human need to find truth in a world of unknowns has led us to develop an aversion to dangerous situations and, even more importantly, to the unknown.
The difference between both concepts is that in the event of a disaster, the probabilities and consequences are predetermined, although the future of the event is unknown. Let’s say you risk playing a dice game where your life is in danger (like Russian Roulette). In this case, your fate will be determined by the death dice, giving you a 16.6% (1 in 6) chance of rolling a number that will end your life. In another example, the probability of dying in a plane crash is 0.0000018% (1 in 5, 371, 369). Although the second scenario is more complex, the basics of risk calculation are the same in both scenarios. We face risks if possible and possible consequences are known.
Conversely, uncertain events are more difficult to control. Here, the possible outcomes are known, but the possible outcomes cannot be determined. And in the most difficult cases it is very difficult or impossible to know the consequences and their probabilities.
Decision Making Frameworks Startups Can Use To Navigate Uncertainty
So, in many ways, anything that requires us to make a decision can be found somewhere in what we might call Clarity-Opacity (Figure 1), which shows our level of knowledge about possible outcomes and potential consequences. a particular situation (and level of control). The consequences and possibilities of UnderRisk are known; In the case of a Black Swan, the probability of its occurrence is very low – even if it is considered low – but if it does occur, we are faced with a disproportionate outcome; Under Knightian Uncertainty, the outcomes are known but their probabilities are unknown; and finally, under Radical Uncertainty, outcomes and probabilities are unknown.
It is important to know the difference between risk and uncertainty because it shows us that the situations we have to deal with in our modern life are largely uncertainty of some kind: Should I spend now or save money? Will I choose a job I really like or will I choose an uninteresting but well-paying path? Should I start working after college or make time to travel? Should I quit my job to start a hobby business? Should I continue or end my relationship with my lover? Readers, feel free to expand this list by up to a month and return as often as you like with related questions.
However, it cannot be denied that risk scenarios are highly visible, as knowing the possible outcomes and their probabilities helps us create a picture in which each strategy has measurable and controllable consequences. Therefore, if we want to make better decisions, we must do everything we can to transform conditions of uncertainty – even in an imaginary way – into conditions of risk.
Decision Making Under Uncertainty
No, this is not a joke. Although humans are generally pretty good at making decisions, especially in familiar or simple situations, our failures to choose the right course of action in difficult situations have proven throughout history to be more than simple myths. However, leaving aside the limits of awareness and knowledge or the influence of human relationships, our highly unreliable ability to make correct decisions is based on the lack of logical systems that allow us to organize our knowledge of the world (both objective and subjective). – when making decisions. Remember that a good decision is determined by the process followed, not the end result.
Subjective Expected Utility (SEU) refers to the method of writing[i] -e.g. It tells us how to make decisions based on ideas or concepts of what “reasonable behavior” should be[ii]. Unlike previous models, SEU can overcome our ignorance of the probability of any uncertain event by predicting it.
SEU confirms that we should choose a particular method among various options when the relationship between its attractiveness and availability is higher than others.
Decision Making In A High Growth Environment
Let’s apply the Subjective Expected Benefit approach to decision making using one of the first examples: Should I quit my job to start a beauty business?
2. Next, identify possible future outcomes and estimate the probability[iv] of each outcome occurring.
It results from the interaction between each process and the possible outcomes. From -100, which is least important or unsatisfactory, to +100, which is very important or satisfactory[v]. This value is called
Solved Decision Making Alternatives Uncertainty High Risk
4. Finally, in any case, follow the steps below. Choose the method with the highest SEU value.
SEU of each option = (probability of outcome 1 * usage of outcome X) + (probability of outcome 2 * usage of outcome Y)
From the matrix, we can say that leaving a job is the decision that is the option that will provide you with the most useful information or satisfaction based on our estimates of the factors that make it up. Obviously, when different conditions are compared, the SEU will also be different and therefore the appropriate method will be different.
Chapter 15 Decisions Under Risk And Uncertainty
The main advantage of methods such as Subjective Expected Utility is that they allow us to determine what is in our best interests, which is a very difficult problem when the things being evaluated are new, difficult, or the problems are large. Since SEU predicts needs with numbers, we can compare alternatives and predict what we like and what we need to do; A very useful thing when your tendencies, emotions or assumptions are not reliable enough.
Through personal assessment of possible outcomes and potential consequences, this tool can take events out of the world of uncertainty and bring them closer to risk. You can’t kill the beast, but you can tame it. How much better would some aspects of our lives be if the most important decisions were made rationally, like SEU?
But the decisions taken by the SEU are based on a rather ambitious point of view: all the factors that constitute them (activities, results, probabilities and consequences) are clearly defined and measured. Therefore, the “Holy Grail” of decision-making seems to require obtaining the highest level and amount of information, free from noise and bias, and using it with clear rules that determine the most effective method [vi] .
Manage Risk Archives
And then the question can be asked: Do we know enough about the world to make a definitive statement about events? Can we discern what gives us more or less satisfaction? Can we trust that our interests and preferences will not change dramatically in the future? How fragile are the decisions we make today, even though we know that time will bring unexpected things to our lives? How can we be sure that our decisions will not lead to negative secondary and tertiary consequences? In short, how sure can we be that what we have is adequate and sufficient? Can our intelligence limits handle this much information? As you can imagine, there is no guarantee of success even if we follow the right path. If the product is defective, the product is also defective.
As we will see in later articles, the goal of seeking information is an impossible goal to achieve.
We will use principles of Psychology, Risk Management, Behavioral Economics, Probability Theory and Philosophy to explore different ways of overcoming our psychological weaknesses, knowledge acquisition difficulties and ontological uncertainties.
Risk: Expected Value: Evaluating Risk And Uncertainty
Finally, I invite readers to directly test the Subjective Expected Utility method and use it as a tool to determine which measures, large or small, will give you the greatest happiness. Although the SEU method is far from infallible, mastering the method and being able to apply its principles is both beginner and difficult.
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