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Unformatted text preview: , reduce ignorance as much as possible by gaining full information and
understanding…Secondly attain as much control or predictability as possible
by learning and responding appropriately to the environment…Finally,
wherever ignorance is irreducible, treat uncertainty statistically.”
Thompson (1967) suggests that organisations constrain the variability of their internal
environments by instituting standard operating procedures and reduce the variability
of external environments by incorporating critical elements into the organisation (that
is, by acquisition or by negotiating long-term contractual arrangements). Similarly,
Allaire and Firsitrotu (1989) list several “power responses” used by organisations to
cope with environmental uncertainty including shaping and controlling external
events, passing risk on to others and disciplinary competition. However, the standard
procedure for coping with risk and uncertainty advocated in the investment decision- 14 making literature is outlined in the section of this literature referred to as decision
theory (Clemen and Kwit, 2000; Clemen, 1999; Goodwin and Wright, 1991; French,
1989; Raiffa, 1968; Howard, 1968; Raiffa and Schlaifer, 1961).
In the decision theory literature, the process decision-makers are advised to adopt for
coping with risk and uncertainty involves three steps known as R.Q.P. (Lipshitz and
Strauss, 1997). The first stage involves the decision-maker reducing the risk and
uncertainty by, for example, conducting a thorough information search (Kaye, 1995;
Dawes, 1988; Janis and Mann, 1977; Galbraith, 1973). The decision-maker then
quantifies the residue that cannot be reduced in the second step. Finally, the result is
plugged into a formal scheme that incorporates risk and uncertainty as a factor in the
selection of a preferred course of action (Newendorp, 1996; Smithson, 1989; Hogarth,
1987; Cohen et al., 1985; Raiffa, 1968). Each step will now be discussed further.
This will highlight the role of quantitative techniques and introduce the concept of
decision analysis. The section will conclude by identifying the need for a study that
ascertains which of the many decision analysis tools and concepts described in the
decision theory literature are the most appropriate for investment decision-making.
This is the first research question that this thesis aims to address.
Strategies for reducing risk and uncertainty include collecting additional information
before making a decision (Kaye, 1995; Dawes, 1988; Galbraith, 1973; Janis and
Mann, 1977); or deferring decisions until additional information becomes available
and it is possible to reduce risk and uncertainty by extrapolating from the available
evidence (Lipshitz and Strauss, 1997). A typical method of extrapolation is to use
statistical techniques to predict future states from information on present or past
events (Butler, 1991; Allaire and Firsirtou, 1989; Bernstein and Silbert, 1984;
Wildavski, 1988; Thompson, 1967). Another mechanism of extrapolation is assumption-based reasoning (Lipshitz and Strauss, 1997). Filling gaps in firm knowledge by making assumptions that go...
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- Summer '14
- The Land