Uncertainty and risk in decision-making

Enterprise management, as well as, for example, state tasks of socio-economic nature, can be carried out taking into account actual uncertainties and risks. What is their specificity? How can they be calculated?

What is the essence of uncertainties and risks?

First of all, let's consider the concept of risk and uncertainty, then, how these terms can be interpreted in various contexts.

Under the risk it is accepted to understand the probability of an adverse or undesirable event. For example, if we are talking about business, it could be a change in the market situation, so that the results of the economic activity of the enterprise will be far from optimal.

Uncertainty is understood as the lack of the ability to reliably predict the occurrence of an event, irrespective of how much it can be considered desirable. But, as a rule, uncertainty and risk are considered in the context of unfavorable conditions. The reverse situation - when it is impossible to predict the appearance of positive factors, is rarely perceived as uncertain, since in this case there is no need to determine the tactics of responding to the relevant factors. While in negative scenarios such tactics are usually needed. This is due to the fact that under the conditions of uncertainty and risk, the most important decisions can be taken - economic and political. Let's study how this can be done, in more detail.

How to minimize uncertainty and risks?

The adoption of certain decisions in an environment characterized by uncertainty and risk is carried out using concepts that minimize the likelihood of errors or various undesirable scenarios. This approach can be effective in a variety of situations.

Uncertainty and risk are inherent, therefore, for many spheres of life of modern man. Approaches that are used in cases where it is necessary to minimize errors in certain actions may be based on:

- on the identification of stable factors that can influence the situation;

- on the analysis of resources and tools available to the person who makes decisions;

- on the definition of temporary and unstable factors, which can also influence the situation, but this is possible only under specific conditions (they also need to be identified).

Among those areas in which relevant concepts find the greatest demand - management. There is a point of view that in the context of business management, uncertainty is managerial risk, and one of the main. Here we find, therefore, one more variant of the interpretation of the term in question. In the sphere of management concepts, within which the essence of various risks are investigated, are very common. Therefore, it will be useful first of all to study how uncertainty and risk are taken into account in the process of making managerial decisions at the enterprise.

Business management under uncertainty and risk

In business, the following approach to overcoming possible negative consequences in solving certain tasks is common.

First of all, managers determine the list of objects whose behavior can be characterized by uncertainty and risks. This can be, for example, the market price of a sold product or service. In conditions of free pricing and high competition, it can be very problematic to unequivocally predict its course. There is an emerging risk of uncertainty from the perspective of the company's prospects for revenue. Its magnitude due to falling prices may not be enough to pay off current obligations or, for example, to solve problems related to brand promotion.

In turn, unexpectedly sharp rise in prices can lead to accumulation by the firm of excessive volume of undistributed profit. Which, perhaps, in a different situation - with the planned dynamics of revenue receipt - management would invest in the modernization of fixed assets or the development of new markets.

After the object, which is characterized by uncertainty and risks from the point of view of business development, is identified, work is underway to determine the factors affecting the behavior of this object. This can be figures reflecting market capacity and sales dynamics for enterprises that operate in one or another segment. This may be a study of macroeconomic, political factors.

The concept of risk and uncertainty, as we noted at the beginning of the article, can be related to processes in a variety of spheres. Therefore, as a rule, the widest range of factors is taken into account here. For example - those that are relevant to the financial sphere. We will study how the conditions of uncertainty and risk are investigated in the course of making decisions on various monetary transactions.

Factors of uncertainty and risk in the financial sphere

Above we noted that enterprise managers, developing an algorithm for making management decisions, first take into consideration an object that can be characterized by uncertainty and risks, after - identify factors that determine the probability of the appearance of conditions under which they can work.

The same can be done in the course of solving problems related to financial management. In the field of monetary transactions, an object that can be influenced by uncertainty (risk is its particular case) is most often the purchasing power of capital. Depending on certain conditions, it may increase or decrease. For example, due to inflation in the economy of the state, the exchange rate difference in the assessment of the national currency. Which, in turn, can depend on macroeconomic, political processes.

Thus, in the area of decision-making related to capital management, levels of uncertainty (risk - as private, again, its case) can be presented at different levels.

First, at the level of economic macroeconomic indicators (for example, GDP dynamics, trade balance, inflation), and secondly, in the area of individual financial indicators (as an option, the national currency rate). Factors at both levels determine what the purchasing power of capital will be.

Having determined the object, characterized by uncertainty and risks, and also identifying the factors that affect them, it is necessary to apply the method of practical application of the decision. For example - worked out by company managers or financial experts. For this, there are a large number of approaches. Among the most common are the use of a matrix of solutions. Let's study it in more detail.

Matrix as a tool for choosing solutions in a risk and uncertainty environment

The methodology in question is characterized primarily by universality. It is perfectly optimal for making decisions on objects that are characterized by economic risks and uncertainty, and therefore applicable in management.

The decision matrix assumes the choice of one or more of them based on the greatest probability of the effect on the object of the chain of factors. So, the main decision is chosen - calculated for one set of factors, and in case they do not work (or, conversely, turn out to be relevant), then another approach is chosen. Which involves the impact on the object of already other factors.

If the second solution is not the most optimal, then the next one is applied, and so on, until it comes to choosing the approach that is least desirable, but giving the result. Formation of a list of decisions - from the most effective to the least effective, can be carried out using mathematical methods. For example, assuming the alignment of the probability distribution of the probability of a particular factor.

The conditions of uncertainty and risk can theoretically be calculated using the methods of probability theory. Especially if at the disposal of the person who is engaged in this, there are sufficiently representative statistical data. In the practice of economic and financial analysis, a large number of criteria have been formed, according to which the probability of occurrence of certain uncertainty and risks can be determined. It will be useful to study some of them in more detail.

Criteria for determining probability in the analysis of uncertainty and risks

Probability, as a mathematical category, is usually expressed in percentages. As a rule, it is not a single value, but the totality of those - based on the factors that trigger the factors are formed. It turns out that several probabilities are taken into account, and their amount is 100%.

The main criterion for assessing the degree of probability of triggering of certain factors is objectivity. It must be confirmed:

- proved to be effective mathematical methods;

- results of statistical analysis of significant amounts of data.

Ideal - if both tools are used to identify objectivity. But in practice this situation is rare. As a rule, economic risks and uncertainty are calculated when there is access to a relatively small amount of data. This is quite logical: if all enterprises had the same access to relevant information, then there would be no competition between them, and this would also affect the pace of economic development.

Therefore, the emphasis in the analysis of economic risks and uncertainty to businesses often have to do on the mathematical aspect of calculating the probability. The more sophisticated the company's methods are, the more competitive the company will be on the market. Let's consider what methods can determine the probability of formation of conditions for the triggering of the factors of behavior of objects in relation to which the situation of uncertainty can be observed (risk as its particular case).

Methods for determining the probability

The probability calculation can be carried out:

- through analysis of typical situations (for example, when only 1 of 2 events are most likely to occur, as an option: when an coin is tossed, an eagle or tails fall out);

- through the distribution of probabilities (based on historical data or sample analysis);

- through expert analysis of scenarios - with the involvement of experienced professionals who are able to investigate factors that affect the behavior of the object.

Having defined the methods of calculating the probability in the calculation of uncertainty and risks, you can proceed to its practical definition. We will study how this problem can be solved.

How to determine the probability of an uncertain event in practice?

The practical definition of the probability of the triggering of a factor affecting an object that is characterized by uncertainty and risks begins with the formulation of specific expectations from the relevant object. If such is the purchasing power of capital, then it can be expected to grow, maintain its level or decline.

The goals of the financier in this case can be, for example:

- investment of capital with a declining purchasing power in the modernization of fixed assets;

- the formation on the basis of cash with a stable or growing purchasing power of additional amounts of retained earnings.

Suppose that a financier expects that capital - due to inflationary reasons - will still reduce its purchasing power, as a result of which it will have to be invested in the modernization of fixed assets. Thus, the risk (degree of uncertainty) in this case is that a significant amount of capital will be invested in a liquid asset, while its purchasing power may, contrary to expectations, grow. As a consequence, the firm will lose undistributed profits. Its competitors, in turn, can use their capital more efficiently.

Having defined expectations with respect to an object characterized by uncertainty and risks, it is necessary to study a set of factors influencing the behavior of the relevant object. These can be:

- economic indicators of the state (among them - inflation, the national currency rate, which we have already mentioned above);

- situation in the market of raw materials, materials and funds claimed by the firm (relative to the cost of which the purchasing power of corporate capital is calculated);

- the dynamics of capital productivity (determining the prospects for the modernization of the company's fixed assets).

Further, using mathematical methods, the firm calculates the greatest degree of impact on the object of various factors, and then determines the probability of each of them triggering.

So, it may turn out that the bulk of the company's capital is spent on the purchase of raw materials, materials and funds, while they are mainly imported from abroad. Consequently, the growth or decline in the purchasing power of the organization's cash resources will depend, first of all, on the dynamics of the national currency rate, and to a lesser extent on official inflation.

Sources of uncertainty (risks) in this case will have a macroeconomic nature. For example, the national currency balance is affected primarily by the state's balance of payments, the ratio of assets and liabilities, the level of public debt, the total volume of transactions using currency in settlements with foreign suppliers.

Thus, the probability of an undefined event - increasing, maintaining a stable value or decreasing the purchasing power of capital, will be calculated by identifying the main factors that affect the relevant object, determining the conditions for triggering these factors, and the likelihood of their occurrence (which, in turn, may depend From factors of a different level - in this case, macroeconomic).

Risk-based decision making

So, we have studied how the probability of conditions for triggering factors that affect the behavior of an object characterized by uncertainty and risks can be calculated. It will also be useful to study in more detail how decisions can be made in the face of uncertainty and risk.

Modern experts distinguish the following list of criteria that can be oriented in the framework of similar tasks:

- probability of observing the expected indicators;

- prospects for achieving extremely low and high values for the indicators under consideration;

- the degree of variance between the expected, the minimum and the limit.

The first criterion involves choosing a solution, the implementation of which can lead to the achievement of an optimal result - for example, in the issue of investing capital in the opening of a factory for the production of TV sets in China.

The expected indicators in this case can be based on historical statistics or calculated (but based, again, on some practical experience of specialists who make a decision). For example, managers may have information that the profitability of TV production at the plant in China is on average about 20%. Therefore, when they open their own factory, they have the right to expect a similar indicator of the efficiency of investment of capital.

In turn, they may be aware of cases in which certain firms did not reach these figures and, moreover, became unprofitable. In this regard, managers will have to consider and such a scenario as zero or negative profitability.

However, financiers may have information about the fact that some firms managed to achieve the efficiency of investing in Chinese factories in the amount of 70%. Achieving the corresponding indicator is also taken into account when making a decision.

The risk (the result of uncertainty in this case) when considering the possibility of investing in the opening of a factory in the People's Republic of China can be the emergence of conditions for the triggering of factors negatively affecting the object - the level of profitability. Those factors that can lead to the fact that the corresponding indicator will be negative. At the same time, another result of uncertainty may be the achievement of profitability of 70%, that is, the figure that has already been achieved before by another business.

If the negative profitability was shown, relatively speaking, 10% of the factories opened in China, the figure in 70% will reach 5%, and the expected - in 20% - was recorded following the work of 85% of the factories, managers can rightly take a positive Decision on investing in the opening of a plant for the production of televisions in China.

If negative profitability based on the available data will be fixed by 30% of the factories, managers can:

- abandon the idea of investing in factories;

- analyze the factors that can predetermine such a modest investment performance in the production of TVs.

In the second case, uncertainty and risk in managerial decisions will be considered based on new sets of criteria in terms of expectation of optimal, maximum and minimum indicators. For example, the dynamics of procurement prices for components can be studied - as one of the factors of profitability. Or - the demand indicators in the market for which TV sets manufactured at the factory in China are supplied.

Summary

So, we have decided on the essence of such phenomena as uncertainty and risk in business. They can characterize a variety of objects. In the entrepreneurial sphere, this is most often the purchasing power of capital, profitability, the price of prices for certain assets.

Risk is most often considered by researchers as a special case of uncertainty. It reflects the likelihood of achieving an undesirable or negative result of any activity.

Risk and uncertainty are concepts that are closely related to the term "probability" related to mathematics. It corresponds to a combination of methods that allow one to calculate whether the manager's expectations, if it's a business or other interested person, are justified, with respect to factors that can affect the uncertainty and risk in running a business.