Risk Taxonomy and Strategic Rationality in Enterprise Decision-Making Process: A Metacognitive Analysis

Risk Taxonomy and Strategic Rationality in Enterprise Decision-Making Process: A Metacognitive Analysis

Luisa dall'Acqua (Scientific Lyceum TCO, Italy & Live Editions, Inc, USA)
DOI: 10.4018/978-1-5225-3906-3.ch002

Abstract

Over the last decade, risk management has become increasingly important both in financial and non-financial businesses. This is due to the increase in uncertainty caused by a number of internal and external factors. Genesis of business risk can be related to the divergence between external factors and components of organizational and operational structures of companies. In this chapter, a baseline risk taxonomy was proposed, and the cognitive, regulatory, and social components of risk inherent in a decision-making process were analyzed. A synthesis model was then elaborated, which exposes the relationships between decision-maker, decision-making, and environment for risk management, including through decision-making information technology.
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Introduction

Current technological progress has multiplied the difficulty of reading the world in which managers, entrepreneurs, and researchers work, making the ‘problems management’ more and more complex, even the most day-to-day issues, and imposing on the mind of the decision-maker to learn and manage the ‘complex’.

The natural and social world is complex: it includes many significant differences that coexist in the same space and time and much unpredictability of effects (randomness). Executing choices in such a complex context involves running an increasing risk of decision bankruptcy, and the need to manage that.

In the last decade, risk management has become more and more important both in financial and non-financial entities, due to increased uncertainty associated with a number of internal and external factors: from its own systemic structural conception, to the uncertainty of the surrounding events, the environment and the market to which it relates, and last but not least, creative dynamics.

A company is constantly interacting with the market and the environment in which it is integrated and operates: it is measured in a highly changing economic context: while the environment is constantly evolving, the business structures have a tendency to rigidity and resistance to change, to be able to efficiently and effectively carry out the production activity. The market establishes the rationality and learning path of the economic system.

In this current market environment, characterized by a widespread uncertainty and constant volatility, companies are called upon to review their own strategy and Risk Management (RM) policies, considering the evolution of the risk concept itself. Indeed, it is necessary to build an integrated approach that involves all the fundamental aspects of a company’s life. Risk-weighted strategies must evolve towards an integrated approach to all business processes, and consider risk not only as a threat but also as a source of opportunities and competitive advantage.

A strategy can be defined as a meta-decision, that is, a decision on how to decide. It is not a programmable rulebook, plan, or set of instructions, but rather a holistic view, that directs and brings consistency to decisions made by an organization or a single agent. By changing the context of operational decisions, strategic meta-decision defines the inherent burthen of complexity, improving logical-rational learning in problematical frameworks and setting-up evolutionary structures.To do this, we need to build an artificial system in which strategic levers are put into action and regenerated over time: the fundamental innovation on which each model is based, the complexity of regulation required, the quality of knowledge that comes from used to make regulation, the kind of rationality that is set to guide the complexity regulated by knowledge. Strategic rationality has two alternatives types of rationality: instrumental and evolutionary.

They are in fact dealing with the problem of generating economic value at three different levels of complexity:

  • Instrumental Rationality: The calculation of “means and ends” on the basis of simplification and ex-ante rendering, as much as possible certain, non-modifiable.The basic operational model remains unchanged. It means handling a complexity at minimum levels (determinism)

  • Evolutionary Rationality: The generation of more or less random variants, an experimental selection of them based on the obtained performances, ex-post retention of those that are satisfactory with respect to the performance requirements to be obtained. The routines remain firm until they work. It means handling a high complexity, but it can proceed with many small micro-variations that accumulate over time (evolutionism)

  • Strategic Rationality: The interpretation and modification of the decision-making problem (meta-decision) by acting in the context of operational decisions (subjects, ends, means, criteria of choice) in an intuitive, creative and holistic manner. It consists of an action that cannot be calculated a priori and cannot be referred to the former post. It means handling a maximum complexity when it comes to changing the rules of the game and sharing them with other actors (Spohn W., 2001)

Defining and pursuing a given strategy is extremely important:

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