When making decisions, managers face three different conditions: certainty, risk, and uncertainty. Let’s look at each.

The ideal situation for making decisions is one of certainty, which is a situation where a manager can make accurate decisions because the outcome of every alternative is known. For example, when South Dakota’s state treasurer decides where to deposit excess state funds, he knows exactly the interest rate being offered by each financial institution and the amount that will be earned on the funds. He is certain about the outcomes of each alternative. As you might expect, most managerial decisions aren’t like this.

Far more common is a situation of risk, conditions in which the decision maker is able to estimate the likelihood of certain outcomes. Under risk, managers have historical data from past personal experiences or secondary information that lets them assign probabilities to different alternatives.

What happens if you face a decision where you’re not certain about the outcomes and can’t even make reasonable probability estimates? We call this condition uncertainty. Managers do face decision-making situations of uncertainty. Under these conditions, the choice of alternative is influenced by the limited amount of available information and by the psychological orientation of the decision maker.