Analysis of decision making process under uncertainty: An application example in cement industry in Turkey

Uncertainty is defined as a situation in which many outcomes of a particular alternative are possible but the probability of each outcome is unknown in decision making process. When uncertainty is assumed as a surprise event faced by individual?s mind, it can be said that it changes the individual?s foresight. Uncertainty is generally defined as a lack of information and it is expected by observations by means of probability distributions. On the other hand, since decision makers generally deal with uncountable quantities, subjective probabilities are generally utilized in the analysis of uncertainty. In the evaluation process of future events, the uncertainty is considered to be resulted from changes in market demand, changes in production conditions, inventions and innovations, macro economical risks and political changes, etc. Uncertainty is composed of three forms as price uncertainty, technological uncertainty, and price-technological uncertainty. In case of price uncertainty, firms are uncertain about demand-supply values of other economical agents. Under price uncertainty, since firms decide production quantities before market price is certain, the beliefs of firms on the prices are only configured on subjective probability distributions. Under certainty, firms increase productions as prices increase. However, expectations are generally based on the increase in average price when the firm encounters with uncertain prices. Therefore the movement of average price plays very important role on the analysis of uncertain cases. One of the most important forms of uncertainty is technological uncertainty. In order to analyze technological uncertainty, the production functions of firms are written in terms of representative inputs and random variables. The uncertainties in market prices are resulted from not only change in demand but also uncertainties in supply conditions. Since the production uncertainty leads to market uncertainty, the firms are generally subjected to both forms of uncertainty named as price-technological uncertainty. Since firms make investment plans according to future incomes, relationship between time and uncertainty is very important for decision making process. The time concept is incorporated into the uncertainty model by means of various methods such as risk-adjusted discount and certainty-equivalence approaches. In decision making process, uncertainty concept is defined by statistics such as expected value, variance, standard deviation, coefficient of variation, and probability distributions. Behaviors of firm under uncertainty are directly related to utility functions and risk preferences. Under uncertainty, the risk attitudes of decision makers are divided into three groups as risk-averse, risk-neutral, and risk-lover. The shape of utility function and differentiability assumptions are used to explain the risk preferences of decision makers under uncertainty. The indifference curves are also used to analyze the behavior of firms under risky conditions. In this study, the decision making processes of firms under uncertainty were analyzed, the uncertainties in cement industry in Turkey were defined, and the behaviors of cement manufacturers under uncertainty were discussed.