Question

It has been said that today’s world is constantly changing; making even short term planning increasingly difficult. Why should an organization or country bother to plan in an increasingly unpredictable world? Please discuss and provide references

Answer 1

Organisation or country should be planning even if the world is unpredictable.

Even if the world is unpredictable, there are different probabilities which can be assigned to different events. This assignment of probabilities will help organisations and countries to plan ahead of the things. This will also help them to calculate payoffs in different cases. Calculating the expected value will help them to choose wisely and rationally.

Say, for eg,

Economy can be in boom phase or recession phase. i.e. it is unpredictable. So, a probability should be assigned to economy being in boom phase and recession phase. Say, 10% chance of boom and 90% chance of recession. Again a project can deliver NPV of 100 if economy is in boom and NPV of -10 if economy is in recession. Then should the project be undertaken or not?

Above question can only be framed if organisation or country is planning things, assigning probabilities to outcomes. These probabilties might not be correct, but, this at least gives them an idea whether to take up projects or not. With time with the learning process, probabilities can be modified and can get better. Still, there will be some error.

Solving above question will be easy, you can find expected NPV. So in boom phase 10%*100 and in recession 90%*-10, will give me NPV of positive 1. Positive NPV will make the project acceptable. Accepting the project was only possible by considering that there is 10% chance of economy in boom phase.

This analysis can go further to provide more information about the probabilities. Say, you are required to find a probability at which NPV becomes zero. So, now the approach to the solution will be

Expected value = p*100 - (1-p)*10 = 0

p = 1/11 i.e. 9.09%

So, new inference that can be reached out will be that, if probability economy being in boom phase is 9.09% or more then the project becomes acceptable.

So, even if the world is unpredictable, probabilities can help organisations take rational decision.

This process will help organisations to avoid irrational risks.