Decision Making Under Uncertainty

1. Decision Making Under Uncertainty Jim Bosscher Trinity Health Gerry McNamara Michigan State University Bill Nunan Nunan Venture Services Robert Wiseman Michigan State University

2. Risk and Uncertainty • Risk implies outcomes can be identified and measured • Loss exposure • Probability of loss • Uncertainty implies unknown and unknowable outcomes. • Lack information about what outcomes are possible • Lack information to measure known outcomes

3. Purpose and Format of the Session • An open forum to discuss how individuals and firms deal with uncertainty • Format • Introduction of the panel members • Brief presentation on uncertainty and how firms deal with uncertainty • Opening comments from each panel member • Open Q&A period

4. The Nature of Uncertainty and Decisions Gerry McNamara

5. Types of Uncertainty • State Uncertainty (Perceived Environmental Uncertainty) • Unpredictability about key elements of the external environment of the firm • Economic conditions, demand conditions, availability of resources, regulatory changes, etc. • Effect Uncertainty • The inability to predict the effect of changes in the external environment on the firm • Response Uncertainty • The difficulty to identify all available responses to environmental changes • The inability to predict competitor responses to firm actions

6. The Two Sides of Uncertainty • Uncertainty creates opportunities for strategic leadership and success. An ever-changing, uncertain world provides entrepreneurial opportunities. • However, uncertainty also hampers strategic decision making. • Makes quantitative evaluation difficult • Lessens value of and confidence in intuition • As a result, it tends to trigger overly conservative strategic decision making (e.g. the current bond bubble, constriction in VC investing) • Hence, missed entrepreneurial opportunities

7. Attempts to Convert Uncertainty into Risk • Tools and behaviors that provide an illusion of control • Forecasting • Assumes history repeats • Retrospective logic to understand causal relations • Financial modeling • Complex models give the appearance of thoroughness • E.g., Value at risk models • Outsourcing assessment • “Expert” assessments, such as credit rating agencies • Bandwagon actions • Consensus decision making • Pluralistic ignorance

8. Mitigating the Negative Side of Uncertainty • Decision Making Tools • Scenario Analyses • Fosters the assessment of state and effect uncertainty • Lessens downside focus • Aids the development of contingency planning • Game Theory • Model competitive interactions (response uncertainty) • Identifies strategic options (response uncertainty) • Lessens the perception of a lack of control

9. Mitigating the Negative Side of Uncertainty • Firm Actions • Real Option Investments • Hedging investments • Provides an opportunity for early investments to leverage once uncertainty clears • Collaborative Action • Network alliances • Co-develop standards, influence governmental actors

10. Decision Making Under Uncertainty Jim Bosscher Trinity Health Gerry McNamara Michigan State University Bill Nunan Nunan Venture Services Robert Wiseman Michigan State University