Every decision is a balance between what we believe to be true and what we are forced to predict. Every decision involves the analysis of available information and ultimately the selection of a choice among alternatives with varying degrees of uncertainty.
It follows that the better our information and the more balanced and thorough the analysis, the higher can be the quality of our decisions. Better decisions are informed, reasoned, and balanced. Making better decisions means living with less risk.
Poor decisions are risky. They are made without a full understanding of what might go wrong. It is not that if you make a poor decision you are necessarily going to be proven wrong (e.g. make a bad investment or purchase a defect-prone vehicle), but that the decision was made without a full understanding of the uncertainties or risks involved.
With poor decisions, risks are understated and returns exaggerated. High quality decisions imply a complete understanding of the uncertainties involved. Making high quality decisions involves recognizing what risks you are taking. It is about making informed decisions.
Risks are the residual uncertainties left behind when decisions are made without perfect information. But of course we never have perfect information. We therefore make decisions based on what we believe to be true and take a chance (accept the risks) of being wrong. High quality decisions are decisions in which the magnitude of the risk of being wrong is understood.
The quality of decisions can therefore be judged by the degree to which uncertainties (risks) are considered in the decision making process. The highest quality decisions are the ones that have the least unknowns. In other words, they are made with the most knowledge about possible future events.
Risk management (planning for possible future events) therefore begins by ensuring that an organization’s decisions are of the highest possible quality given the constraints of time and resources.Decision Analysis
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