Page 45 - APM Integrated Workbook STUDENT S18-J19

Environmental influences

Risk and uncertainty

3.1 Introduction

 All organisations face risk and uncertainty.

 Risk is the variability of possible returns. There are a
number of possible outcomes and the probability of each
outcome is known.

 Uncertainty is also the variability of possible returns. There
are a number of possible outcomes and the probability of
each outcome is not known.

 Exogenous variables originate from outside the
organisation and are not controllable by it.

A number of tools are available for making decisions where there is
an element of risk/uncertainty involved. Four key tools will be
explored here.

3.2 Expected value (EV)

 The average return if the decision is repeated again and
again.

 EV = Σpx where x = value of possible outcome and
p=probability of outcome.

Suitability of tool for organisation

 Suitable if organisation has a risk neutral approach to risk. The organisation
would commit to the course of action that would deliver the highest average
outcome (EV).

 Not useful for one off decisions, not useful if probabilities and/ or the values of
the outcomes are uncertain/ unknown and not useful for a non-risk neutral
decision maker.

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