What is decision making environment?

Decision making environment is the prevailing state of riskless that determine the decision to be made over a certain issue or event. There are three such states which include;


Certainty situation is an environment where by the probability of the event outcome is 100% of surety. That is it is well known that the event will occur. A good example of an event of such nature is the rising of the sun. We are sure sun will rise from the east and set in the west on daily basis. In a state of certainty, there is no need to make decision for we are sure of the outcome from our course of action. In this environment complete information is accessible as to the conditions of nature will happen. In other words, the decision making process just involves picking the best alternative.


Risky state is a situation where by the probability of occurrence of an event can be allocated or assigned a certain level of probability of its occurrence. This is because there exists past or historical data of the occurrence of the particular event. From past experience, it is possible to assign a certain level of probability that a certain event will occur.

This is a fair situation as compared to uncertainty. For instance, when we say the chances of occurrence of an event is 60%, it means that from the past experience, the event occurred in that pattern. That is why it is possible to estimate the future occurrences. 


This is a state in decision making where by it is not possible to assign a probability of occurrence for historical data for such an event is not available. For instance, aero plane accident where it hit on someone while it is airborne. This has never happened in the human history and hence we cannot assign probability. This is the worst scenario in decision-making for it is almost impossible to decide. In other words, outcome cannot be predicted with statistical confidence. In other words, outcome cannot be predicted with statistical confidence. The decision making process depends on the risk attitude of the decision maker.

In a case of uncertainty, there are particular decision criteria which are used to select the best alternative. Those criterion are;

  1. Maxi-Max Decision Rule
  2. Maxi-Min Decision Rule
  3. Mini-max Regret Model
  4. Laplace Criterion of Rationality

The above criteria are discussed shortly.

About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.