Essay (Due Date: January 29, 2017) Please Read and review for assignment: Chapter 3: Decision Analysis,pp. 67-85; and Section 3.10, Utility Theory on pp. 88-89 In an essay of no less than four pages,...

Running Head: Decision Analysis under uncertainty and risk
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Decision Analysis under uncertainty and risk
Author’s name
Affiliation
Decision Analysis under uncertainty and risk
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Introduction
Managers in the organisation need to make important and critical decisions under volatile and
uncertain conditions which increases the risk factor in the decision making process. There is a
difference between making decisions under conditions of risk and uncertainty. When the
outcome is not known with certainty due to decision taken by the manager, it is called as the
risky condition. Risk may vary for different organisations when same decision is taken by the
manager by assigning different probability to all negative as well as positive outcomes. On the
other hand, uncertainty occurs when the manager is not able to judge all the outcomes associated
with given decision taken by him under particular circumstances. The paper discusses about the
difference between making decisions under these two situations – uncertainty and risk.
Decision making under conditions of risk
Risk is not only attached with investment of money in different avenues but its intensity is also
considered during decision making by the managers. There is positive relationship between level
of uncertainty and the risk associated with it and that is why the risk arises when it is not
expected to have the detrimental outcome because of any change. Managers would like to attain
the optimality in making maximum return by striking a balance between the trade-off attached
with risk and return. For instance, managers need to make decisions related to investment in new
avenues in the form of foreign direct investment or in the form of portfolio investment. Each
investment has both the elements – risk and return. Usually higher the level of risk, higher will
be the return attached as is the case with long term bonds which represents risky investments
with higher returns. The level of risk is highly influenced by the economic conditions as well as
political upheavals prevailing in the external environment of the organisation. For example,
Decision Analysis under uncertainty and risk
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during 2008 recessionary period in U.S., there was heavy fall in the interest rate which
discouraged investors to put their money into any investment avenue at that time. Managers
would implement its statistical and econometrics techniques to identify the net benefit in case of
such risky investments. Economic fundamentals such as theory of determining the relationship
between...