The element of uncertainty can be seen in almost every area of human activity. In fact, this is the environment in which various relationships are formed, as well as economic activity.
Uncertainty is an inherent characteristic of real business conditions. After all, an entrepreneur, despite his experience and professionalism, cannot influence every really existing socio-economic process or foresee absolutely all possible situations that accompany the adoption of his decisions and their implementation.
The concept of uncertainty and risk
Thinking about entrepreneurial activity, about organizing a firm, company or private business, a person must understand that economic uncertainty will always be his main companion. Its manifestations are especially noticeable in the process of making important decisions, when an entrepreneur collects and analyzes the information available to him. This concept illustrates the limited possibilitiesleader, because it is impossible to get complete information about the object or situation being studied. The entrepreneur has to be content with the data that is available to him and make decisions based on the facts.
As a result, at the implementation stage, the project may be affected by unforeseen factors, that is, there is a real risk that threatens its successful implementation.
Since uncertainty is an inherent business environment, it should be noted that risk cannot be zero. For the same reason, one cannot speak of 100% certainty in the implementation of the chosen solutions: any goal is not achieved to one degree or another.
Why there is uncertainty
Speaking about its sources, first of all, it should be mentioned the incompleteness and insufficiency of human knowledge regarding the surrounding world in general and the economic sphere in particular. Such uncertainty is the oldest and most formidable opponent of the entrepreneur, since ignorance of the laws of nature has long been a serious obstacle in the conduct of production activities and the economy.
Another source is the phenomenon of chance. This is the name of events whose course cannot be predicted, since under the same conditions they can occur in different ways. Planning for every situation is not possible. An accident is recognized as a sharp breakdown of equipment, sudden fluctuations in demand for a product, unpredictable supply problems.
Thirdthe reason that influences the conditions of uncertainty is the opposition. It manifests itself when suppliers violate contractual obligations, there is an ambiguity in the demand for a product, and there are difficulties in marketing it.
The difference between the terms "uncertainty" and "risk"
Despite the apparent similarity of these concepts, each of them defines a very specific situation.
The essence of uncertainty is that a person does not have enough information about what may happen in the future. Risk is also ignorance of upcoming events, but the existence of the possibility of predicting the onset of a particular outcome.
Uncertainty cannot be measured, while risk is a measurable quantity, the quantitative measure of which is called the probability of a favorable or unfavorable outcome.
Types of uncertainty and their features
There are two main types of this concept:
- External (exogenous).
- Internal (endogenous).
External sources of uncertainty cannot be reduced by any economic system, since they do not depend on it (consumer preferences, development of technologies in this area, weather conditions). However, entrepreneurs can mitigate their consequences by resorting to insurance.
Internal uncertainty manifests itself as a factor of uncertainty in the assessment of the purchase volume by the buyer or as a lack of clarity regarding the conclusion of a transaction between partners. This category also includes entrepreneurial uncertainty (occurs whenseveral alternative courses of action). This situation can be corrected by a manager or the manager himself.
In addition to the above, there are also several synthetic types, they combine the features of endogenous and exogenous types.
Examples of various types of uncertainty
The difference between external economic uncertainty and internal is the fact that certain external forces have not just influence, but even pressure on the economic agent making the decision. He cannot resist them and is forced to build his activities taking into account the new conditions. Under conditions of internal uncertainty, the decisive determining role belongs to the economic agent, and he makes the final decision. Ordinary economic activity is affected by both.
A good example of exogenous and endogenous uncertainty and how they differ from each other is a dam. Built by man, it is affected by elemental and natural forces.
The destruction of the dam can occur if the designer made a mistake in the design process, there was a marriage in materials or negligence of workers (endogenous uncertainty). Along with this, the structure may be affected by a storm (exogenous uncertainty).
The person managing the project leads the construction process, focusing on endogenous (correct selection of personnel and material) and exogenous conditions (taking into account the possibility of severe storms, laying additionalparameters into calculations).
Political uncertainty is a separate category of exogenous. It manifests itself as the impossibility of predicting the impact of political decisions on the state of the economy in the country. Policy decisions by the government affect taxation, changes in the interest rate, and the production of common goods.
Features of uncertainty analysis
Uncertainty and risk are both critical to setting a realistic and feasible course for an organization. It is impossible to ignore them, since in fact they are contradictions between what is planned and what actually exists.
The conditions of uncertainty that an entrepreneur has to adapt to is the impossibility of predicting a large number of variables:
- Activities of transport workers, suppliers, workers.
- Market situation (changing social needs and consumer demand, the introduction of a technically and technologically more advanced product).
- Natural accidents that cannot be foreseen.
These circumstances significantly influence the setting of clear and defined goals. Also, their uncertainty prevents a full-fledged analysis and identification of the degree of their influence on the achievement or non-achievement of the planned result.
Management decision-making process under uncertainty
The duty of any manager becomes an adequate and timely assessment of the existing andhypothetical situation, and making appropriate decisions.
The problem of uncertainty is that the decision-making process in such conditions is often urgent and urgent, and the required actions can be risky. The problems that have arisen and the risk that they provoke are explicit and implicit. This is determined by the incoming information.
When there are obvious problems, the data is more definite. When there are implicit problems, the management of the enterprise has at its disposal unreliable or insufficient information (it serves as a very weak signal of an approaching danger). In this case, the task of a good leader becomes not ignoring the signals, but increasing observation of how events are progressing.
Decisions made under uncertainty
Taking into account the amount of information that was at the disposal of the head, the following types of decisions are distinguished:
- Accepted under certainty.
- Risk-based (probabilistic certainty).
- Based on uncertainty (unreliability).
Decisions made from the standpoint of reliability (certainty) lead to an increase in the efficiency of development and a decrease in the costs associated with choosing the right option. The main advantage of such situations is that most of the variables necessary for making calculations are entered by the manager himself.
In practice, complete certainty is a rather rare occurrence. If it is necessary to make a decision under risk (socalled measurable uncertainty), use probable estimates. This approach reduces the negative impact of uncertainty.
The risk is that it is impossible to estimate the degree of probability of an event for sure, there may be errors. For this reason, the leader, along with calculations, also uses his experience, intuition and managerial abilities.
The value of these qualities becomes decisive when it is required to make a decision under conditions of complete uncertainty (if there is no way to calculate the probability of the occurrence of specific events).
How the uncertainty analysis process works
Based on the characteristics of economic activity in the context of a lack of reliable information, we can conclude that uncertainty analysis is of great importance. There are two main approaches to the analysis methodology:
- Exploring sensitivity and scenarios.
- Conducting analysis through risk assessment. In this case, various probabilistic-statistical methods are used.
When analyzing the phenomenon itself and its elements, it should be understood that these are objective concepts. It is impossible to completely exclude them from doing business and create unambiguous conditions for business, no matter how many managers would like it. However, uncertainty should not be perceived as only a negative phenomenon. Implicit circumstances and the "muddy water" of the market economy canhide attractive opportunities that show up over time.
True, often the concept of uncertainty in the course of entrepreneurial activity is still endowed with a negative meaning.
Ways to reduce uncertainty
Given the main causes of uncertainty and the degree of its impact on the success of the enterprise (and sometimes on the very fact of its existence), you understand that minimizing this impact becomes a priority for the leader.
Existing ways to reduce uncertainty and risk will not be able to completely eliminate them, but will allow for the possible consequences and reduce losses:
The diversification method involves the distribution of risk between those products that have different characteristics. By increasing the risk of selling or buying one of the products, there is a decrease in the risk of selling or buying another. An example of risk diversification is the release of products that can be used in peacetime or wartime. Regardless of the position in the state, the company makes a profit
- Method of risk pooling. Its essence is to turn an accidental loss into a system of relatively small fixed costs. A good example of this method is insurance, in which regular insurance payments (fixed costs) allow you to receive compensation for a negative risk if it occurs.
- Search forinformation. Its effectiveness is due to the impact directly on the cause that provoked the occurrence of the phenomenon (lack of reliable and complete information). The data obtained can significantly reduce the level of uncertainty. In some cases, even its transformation from immeasurable to measurable (to risk) is possible.
Among the effective ways to reduce the degree of uncertainty is also a group of methods that provide for the division of risk among persons able to "cope" with it:
- The method of risk distribution is that the estimated risk is imposed on several participants. At the same time, the damage of each is small.
- Speculative activity involving the purchase of something with the intention of selling it at a higher price. A person engaged in speculation becomes an intermediary between the end consumer and the owner of the good. He has no guarantees that he will be able to resell the good at a higher price, this is his risk. A speculator buys a product from a risk averse person.
As for the inter-organizational level at which enterprises cooperate and conclude agreements and contracts, one can note the sharing of risks in the form of certain guarantees, mutual obligations and responsibilities. Such techniques can reduce behavioral risks, increase the attractiveness of the project and protect participants from large losses.
A significant role in the process of reducing uncertainty is played by the good managerial qualities of the leader and his ability todeveloping up-to-date forecasts.
