Question

Consistent with the concept of bounded rationality, operations managers may face varied challenges when making decisions under complex environments characterised by certainty, risk or uncertainty. Consider each of the following statements, some of which are incorrect, and answer the question which follow:

i A managerial decision-making under conditions of uncertainty is primarily characterised by states of nature and payoff functions which are broadly probabilistic; whilst decisions under risk have broad uncertainties to them.
ii With the advent of the Fourth Industrial Revolution (4IR), the fusion of advances in artificial intelligence (AI), robotics, machine learning, Internet of Things (IOT) and big data is expected to create an enabling environment to address issues of uncertainty.
iii A decision tree may be used as a tool of appraisal for decisions under risk.
iv In contexts characterised by a dearth of information on risk distribution, decision-making is broadly certain. However, where some measure of the risk distribution is known, decision-making is deterministic.
v Managerial decision-making under risk are characterised by situations where the outcomes are unknown, but probabilities are known. Whilst decisions under uncertainty involve cases where outcomes are unknown and probabilities are unknown.

Which TWO of the statements above are incorrect?

A. ii and iii
B. i and iv
C. iii and v
D. i and iii

Answer 1

Statements i and iv are the two incorrect statements regarding decision-making under uncertainty and risk. Statement i incorrectly characterizes uncertainty with probabilistic elements, and Statement iv mistakenly regards a dearth of risk information as certainty and known risk distribution as deterministic.

Step-by-step explanation:

The question asks which two of the provided statements regarding decision-making under conditions of certainty, risk, and uncertainty are incorrect. Upon A two of the statements are indeed incorrect: Statement i, which suggests that decisions under uncertainty are primarily characterized by probabilistic states of nature and payoff functions, is incorrect because decisions under uncertainty are characterized by not knowing either the probabilities or the outcomes. This also leads to the incorrectness of the second part of the statement, which claims that decisions under risk have broad uncertainties, when in fact they involve known probabilities but unknown outcomes. Statement iv is also incorrect, as it suggests that a lack of information on risk distribution indicates certainty in decision-making, which is a misunderstanding of the term 'certain', and that known measures of risk distribution make decision-making deterministic, which is not necessarily true as risk entails a lack of certainty about outcomes despite having probabilities associated with them.