Effects of Environmental Uncertainty on Information and Decision Processes in Banks

Abstract

This research was partly supported by a grant from the Bank Administration Institute. The effect of environmental diversity and volatility on decision-making strategies is examined for 41 independent banks. Uncertainty is defined and measured in terms of an entropy equation, which combines environmental and probabilistic sources of decision uncertainty. Uncertainty was associated with loan managers' perceptions of the uncertainty of loan repayments and the information they collected before deciding on a loan application. The normal operations procedures used by the banks to process loans varied with the diversity, but not the volatility, of their environment. Volatility was associated with the uncertainty experienced for particular decisions. A theoretical framework with the implication of the two sources of uncertainty is discussed.e