The more complex the problem and more dynamic the environment, the higher the degree of uncertainty in predicting the outcome of a decision. In general, there are three different conditions under which decisions are made; these are (1) complete certainty, (2) complete uncertainty, and (3) risk.
Decisions under certainty:
This is the simplest form of decision making. The condition of certainty exists when decision makers know exactly what the outcome of each alternative will be. The decision maker would simply select the alternative which has the best outcome. If the number of alternatives is relatively small then the outcomes can be compared with each other, either all at once and then picking the best or taking two alternatives at a time, comparing the two and discarding the inferior one and the better one of the two is compared with the next one and so on until all outcomes have been compared and the best one identified and selected. However, if the number of alternatives is large then some mathematical tools are available to identify the best alternative. An example would be buying a new car. Once the decision to buy the car has been made, there are a number of alternative ways of paying for the car.
These alternatives include paying all cash, part cash and part loan, all loan so that you can put your own money to other quantifiable uses or lease the car on monthly or yearly rental. It is possible to calculate the total cost of each of these alternatives and choose the one which gives the lowest cost.
The condition of uncertainty exists when he decision maker has no idea as to what the outcome of the implemented alternative would be. Such problems arise when there is no past relevant historical data on which a judgement can be based.
Decisions are generally made on the basis of intuition and the outcomes are a matter of chance. For example, in the case of marketing a new product, it is difficult to make judgments’ as to how much this product will sell in different geographical areas. When Sony Corporation introduced Data Disc-Man, it had no idea how successful the product would be. Sony’s managers were working in an uncertain environment.
Risk is probably the most frequent situation confronted by managers.
A condition of risk exists when a decision must be made on the basis of incomplete but reasonably reliable information. In such situations, there is no longer just one outcome for each alternative but a number of possible outcomes with a given chance for each outcome. Such chance or probability for each outcome is known, calculated or assigned by the decision maker based upon his past experiences. For example, if you hire a new salesperson, you have some idea as to how much increase in sales you can expect, but you can never be sure.