Certainty Risk and Uncertainty

In making decisions, all managers must weight alternatives many of which involve future events that are difficult to predict, such as a competitor’s reaction to a new price list, interest rates in three years, or the reliability of a new supplier decision making situations are frequently categorized on a continuum ranging from certainty (highly predictable), through risk, to uncertainty (highly unpredictable).

Certainty: Under conditions of certainty, we know our objectives and have accurate, measurable, reliable information about the outcome of each alternative we are considering. Consider for example, the director who must order programs for a story telling festival. She knows the objective get programs printed and can easily compare representative samples from local printers and the prices they quote for printing varying quantities of programs. With this information, she can select a printer and know with certainty will cost. This information will not help her make a more difficult decision through: How many programs should she order? In making this decision she must consider the fact that, while she doesn’t want to run short of programs, ordering too many wastes money that could be better spent ordering high margin souvenir items such as tee-shirts or sweatshirts. The director now moves from conditions if certainty to conditions of risk or uncertainty. Unfortunately, such conditions are far more common than conditions of certainty.

Risk: Risk occurs whenever we cannot predict an alternative’s outcome with certainty, but we do have enough information to predict the probability it will lead to the desired state. If you have ever flipped a coin to make a decision or played a roulette wheel, you have dealt with probabilities. If this is the tenth annual storytelling festival held in this town at this time of the year, the director can analyze the data available to determine, albeit with some risk, the number of programs likely to be needed.

When Bank of America and Security Pacific banks merged in 1992 experts predicted the combination would crush the competition. But what was seen as a ‘certainty’ turned out to be uncertain. As the banks combined operations over 450 branches were closed. Other, smaller California Banks took advantage of the opportunity this presented, advertising increased security and availability of branches. For example, Great Western Bank used actor Dennis Weaver in TV ads: Used to be a bank here. One day it was in business; next day it was gone. The Bank of Fresno, Redlands Federal and Sanwa bank of California are among those have lured customers with a variety of tactics. Sanwa, for instance set up sidewalk card tables across the street from closing branches to sign up new customers.

Uncertainty: Under conditions of uncertainty, little is known about the alternatives or their outcomes. Uncertainty arises from two possible sources. First, managers may face external conditions that are partially or entirely beyond their control, such as the weather an important factor for a three day festival held in outdoors tents. Second and equally important, the manager may not have access to key information If this is a new festival perhaps the director has not formed a network with other festival directors who could share valuable information about likely attendance records. Or perhaps no one accurately predict the turnout for a new storytelling festival held in the fall, when many families are busy with school activities and other events.

Norwest: Playing it safe Global lending

At Minneapolis based Norwest Corporation managers prefer to operate in an area between certainty and risk avoiding uncertainty. The old adage nothing gained has never held any wisdom for Lloyd Johnson, chairman and chief executive officer for year: Lloyd Johnson have avoided risk and expanded only into areas of banking that produce fees without consuming capital. In 1990, while the nation’s top banks were reeling from bad debt, Norwest posted record profits. Earnings rose 37 percent to $281 million producing a powerful 19.6 percent return on equity and a 1.06 percent on assets. In the same year Norwest’s assets rose nearly $7 billion. Norwest’s reserves are at 160 percent of non-performing loans. Can this success really be attributed to playing it safe?

Norwest has not made a non-guaranteed Third World loan since 1984. Of the company’s 1990 income came from no risk, non interest sources such as fees. For example when a Norwest technology client asked for $11 million in trade finance or a deal in China, the company refused to lend a dime. Instead, Norwest organized a consortium of banks that gave the client the capital required. In the old days we would have provided all the money ourselves and made about $170,000 on the deal, says Darin Narayana executive vice president in charge if international banking. Instead we made $85,000 in fees at no risk.