According to smithson 1989 p153 the prescription for

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

Ask a homework question - tutors are online