Some decisions are risky. Others are uncertain. In either case, companies traditionally strive to provide their employees with up-to-date, precise and elaborate information in order to reduce the risk and uncertainty of decision making.
However, decisions made by individuals are irrelevant to organisations. Just consider a manager who decides to increase investment in research and development after reading a newspaper at the breakfast table. The decision is her own. It does not affect the company she works for until other employees take note. Indeed, her individual decision may not lead to an organisational decision if others in the company reject the investment.
We rarely distinguish between decisions made by individuals and decisions made by organisations. But analysing the distinction between the two allows us to focus on what we can manage. Individual decisions are products of consciousness, whereas organisational decisions are products of communication. Thoughts cannot be managed by someone other than the individual who has the thoughts, but communication may be controlled or influenced by participation.
The idea of the communicative constitution of an organisation sees decision making as primarily a communicative problem. Decisions are not only bound by the cognitive capacity of individuals to process information; rather, interpretations of information become more important than providing facts and figures.
Companies can use the idea of an organisation’s communicative constitution to reduce risk and uncertainty in decision making by means of communication rather than overcoming the limits of individual consciousness.
Risk and uncertainty
The difference between risk and uncertainty boils down to the available information about the probability of the decision’s outcome. Buying a lottery ticket is a risky decision but the probability of winning is known. However, developing a new corporate strategy is an uncertain decision and the probability of success is unknown.
Decisions taken under risk are made on the basis of information about probabilities of future states, information that reduces the risk of decision making. Information, however, does not reduce the uncertainty of decisions. Companies deal with uncertainty by labelling it risk. They estimate the probability of, for example, the success of a new corporate strategy based on historical data or future scenarios. This is how companies are capable of action despite the uncertainty of decisions.
Up-to-date and extensive information provides answers to explicit or known questions. Dealing with uncertainty in terms of risk requires companies to seek answers to implicit or unknown questions. Companies must treat the development of a new corporate strategy like buying a lottery ticket: they must at least pretend that they know the odds.
The classic perspective: individual decisions
Over 50 years ago, Nobel laureate Herbert Simon argued that humans possess a “bounded rationality”. They try to be rational in their decision making yet their capacity to seek and process information is limited and they must make decisions on the basis of satisfactory information. Reducing uncertainty is one of the mechanisms by which they deal with their own bounded rationality.
In addition, individuals are prone to a number of cognitive biases. An investment decision with a likely loss at 20 per cent may look attractive in the light of no alternatives. Individuals regularly display overconfidence in their own competences and skills and tend to take riskier decisions in maintaining the status quo than in changing it. After all, losses hurt more than wins bring pleasure, as Daniel Kahneman, another Nobel laureate, demonstrated in several experiments.
Risk and uncertainty are prone to systematic misjudgement on account of bounded rationality and cognitive biases. Yet companies attribute decision making to particular individuals. Whether it is the company-wide agency of a chief executive officer, the project responsibility of a middle manager, or the decision of an expert, it all boils down to individuals who make decisions on behalf of their company.
An alternative perspective: organisation as communication
Communication constitutes organisation. This alternative perspective breaks with the idea that people make up a company. Instead, organisations are seen as interlocking networks of communication events and episodes.
The communication that connects individuals is now at the centre of attention. Organisational decisions, then, are not decisions made by individuals on behalf of organisations: they are collective decisions made in communication. Consequently, reducing the risk and uncertainty of decision making is not about providing more information to individuals; it is about making more information available to communication.
Following this alternative perspective, organisational decisions unfold in an interlocking network of communication events and episodes similar to emerging themes and topics of a discussion or the back and forth of collaboration in a project. For example, the decision to increase investment in research and development triggers subsequent decisions to hire new personnel, buy new equipment and restructure current processes.
Forms and functions of organisational communication
The way companies reduce risk and uncertainty can not only be seen in the network of organisational communication. It is also observable in the form and function of communication to begin with.
If communication were a letter, then its form would be the envelope that delivers information, while the function of communication would the content of that letter. Institutionalised forms and functions of communication – such as meeting minutes and annual reports – are examples of reducing risk and uncertainty of decision making in organisations.
We have to distinguish between two forms of organisational communication: verbal or non-verbal. Verbal communication pertains to language in the widest sense, whether it is spoken words, written text, or other signs and symbols. The proverbial water-cooler conversation and business processes documented in handbooks are both examples of verbal communication. Non-verbal communication, on the contrary, comprises all non-language communication such as facial expressions and bodily gestures.
Most forms of communication are ephemeral. Spoken words do not last beyond the moment they are uttered. The same goes for facial expressions and bodily gestures. A single decision made during a discussion must quickly result in subsequent decisions, or else it is forgotten. A management team may approve monthly budgets, yet without immediate decisions on how to spend the money investments would quickly run over budget.
Written texts thus make a significant contribution to establishing communication structures. For example, accounting as a way of dealing with a budget over time provides the necessary information to all investment decisions in between monthly reports.
Texts allow for the temporal rectification of communication in order to ensure that decisions rely on current, precise and extensive information. They offer structures to handling risk and uncertainty by means of minutes, handbooks, organisation charts, presentations, reports, letters, emails and a myriad of other written forms.
Similar to the risk-seeking or risk-averse behaviour of individuals, the attitude of organisations to handling risk and uncertainty are seen in these communication structures.
In 1955, John Austin distinguished three functions of communication. First, communication performs an utterance of information. Second, it transfers meaning. Third, it affects further communication. Austin called these three functions the locutionary, illocutionary, and perlocutionary aspects of communication.
Consider the statement an investment has a 20 per cent probability of loss. Once the written text is spoken it marks the action of saying or expressing. Furthermore, the uttered information conveys a sense of the risk involved in the investment, namely, the 20 per cent probability of loss. Lastly, it invites a decision to invest or not.
The utterance of information alone reduces the risk and uncertainty of decision making. Without (locutionary) communication, any decision is simply a guess. Companies thus need to ensure that current, precise and extensive information is available to communication when needed. This is most easily done with the help of written forms of communication (e.g. papers, reports, statistics).
Information also conveys meaning to decision making. The statements that there is a 20 per cent probability of success and there is an 80 per cent probability of failure both provide the same information. However, success implies the chance of winning, whereas failure points out the chance of loss. The meaning conveyed in (illocutionary) communication thus reduces the risk and uncertainty of decision making.
Moreover, companies evoke consequences of future decisions with carefully crafted (perlocutionary) communication.
The following two statements do not differ in the information they convey: It’s likely that our company will weather the storm, and There is a danger that our company won’t survive the economic turmoil. The effect of these statements, however, spin the uncertainty of the company’s situation. On the one hand, weathering the storm bears a positive connotation, with following communication likely to pick up the image of a vessel in distress doing everything it can to get through tough times. On the other hand, a danger to the company’s survival implicates a negative attitude which, in turn, impacts decision making for better or worse. The first statement attenuates the possibility of bankruptcy, whereas the other almost calls for the bankruptcy to happen.
Companies may reduce uncertainty with a focus on the utterance of information (locutionary communication). Or they may handle uncertainty itself.
Promises or warnings (illocutionary communication) restrict uncertainty in the light of a particular meaning, whereas persuasions or sanctions (perlocutionary communication) moderate the uncertainty of decision making in anticipation of its outcomes.
Decisions under conditions of risk and uncertainty cannot be reduced to the bounded rationality or cognitive biases of individuals. Individual decisions are irrelevant to organisations as long as they do not enter organisational communication and thus become the decisions of organisations.
Companies are sites of communication where employees support each other with information in order to act in uncertain situations. The risk and uncertainty of decision making are thus handled only in institutionalised communication structures. Companies may harness forms and functions of communication to stay competitive.
Talk, discussions, and decisions are the daily business of companies. Decisions primarily take written form. Even if they are made in, for example, top management meetings behind closed doors, they quickly cascade down the organisational hierarchy in the form of written text.
Emails, minutes and other corporate documents mark a reference for further decision making. Companies must think about the forms of decision premises, heuristics and guidelines that they make available to their employees.
In addition, the function of communication affects decision making in various ways. Comments differ from claims and statements. In many cases, handling uncertainty as risk eases or even allows for decision making to begin with. Working instructions function in different ways from sanction mechanisms. They allow for the handling of uncertainty within the given boundaries of past decisions or in anticipation of future decisions.
The coordination and control of organisations takes place in the interlocking network of communication events and episodes. Therefore, the organisational handling of risk and uncertainty in decision making can be managed with the forms and functions of communication.