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F5 Performance Management > 7 Risk and uncertainty > Flashcards

7 Risk and uncertainty Flashcards

1
Q

What is risk?

A

There are a number of possible outcomes and the probability of each is known

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2
Q

What is uncertainty?

A

There are a number of possibly outcomes and the probability of each is unknown

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3
Q

What are focus groups?

A

A common market research tool invoking small groups selected from the broader population.

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4
Q

What are the problems with focus groups?

A
  • results are qualitative
  • the sample size may mean that results are not a good representative
  • individuals may feel pressure to agree with other members
  • their cost and complexity is cited as a barrier, especially for smaller companies.
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5
Q

What is desk research?

A

Information is collected from secondary sources, it obtains existing data by studying published and other available sources of information. Usually eliminates the need for extensive field work

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6
Q

What factors should be considered when using desk research?

A

It may not be exactly what the researcher needs or up to date
It is cheaper and quicker than field research

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7
Q

What is market intelligence?

A

Information about a companies present or possible future markets

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8
Q

What is economic intelligence?

A

Defined as information relating to the economic environment within a company operates.

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9
Q

What is field research?

A

Information is collected from primary sources by direct contact with a target group, it is expensive but accurate and up to date.

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10
Q

What are the two types of field research?

A

Motivational research and measurement research

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11
Q

What is motivational research?

A

The objective is to understand factors that influence why consumers do or do not products

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12
Q

What are some types of ways to complete motivational research?

A

Depth interviewing
Group interviewing
Word association testing
Triad testing

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13
Q

What is depth interviewing?

A

Undertaken at a length by a trained person who is able to appreciate conscious and unconscious associations and motivations and their significance

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14
Q

What is group interviewing?

A

Where between six and people are asked to consider the subject under trained supervision

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15
Q

What is word association testing?

A

On being given a word by the interviewer, the first word that comes to mind of the person tested is noted

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16
Q

What is triad testing?

A

Where people are asked which out a given three items they prefer

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17
Q

What is measurement research?

A

The objective here is to build on the motivational research by trying to quantify the issues involved

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18
Q

What is random sampling?

A

Where each person in the target population has an equal chance of being selected. (May be unfeasible in practice)

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19
Q

What is quota sampling?

A

Where samples are designed to be representative with respect to pre selected criteria

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20
Q

What is panelling?

A

Where the sample is kept for subsequent investigations so trends are easier to spot

21
Q

What is observation?

A

Though the use of cameras within supermarkets to examining how long customers spend looking at a product

22
Q

What are some common methods of measurement research?

A 
Random sampling
Quota sampling
Panelling
Surveying by post
Observation
23
Q

What is sensitivity analysis?

A

Takes each uncertain factor in turn and calculates the chain that would be necessary in that factor before the original decision is reversed

24
Q

What is the process for sensitivity analysis?

A

1 best estimates for variables are made and decision arrived at.
2 Each of the variables is analysed in turn to see how much the estimate can change before the original decision can be reversed.
3 Estimates for each variable can then be reconsidered to assess the
likelihood of the estimate being wrong
4. The maximum possible change is often expressed as a percentage.
This formula only works for total cash flows

25
Q

What are the strengths of sensitivity analysis? (3)

A
  • There is no complicated theory to understand.
  • Information will be presented to management in a form which facilitates
    subjective judgement to decide the likelihood of the various possible
    outcomes considered.
  • It identifies areas which are crucial to the success of the project. If the
    project is chosen, those areas can be carefully monitored.
26
Q

What are the weaknesses of sensitivity analysis? (3)

A
  • It assumes that changes to variables can be made independently, .
  • It only identifies how far a variable needs to change; it does not look at
    the probability of such a change.
  • It provides information on the basis of which decisions can be made but it does not point to the correct decision directly.
27
Q

What is simulation?

A

A modelling technique that shows the effect of more than one
variable changing at the same time.

28
Q

When is simulation often used?

A

Capital investment appraisal.

29
Q

What is the Monte Carlo simulation method?

A

Uses random numbers and probability statistics. It can include all random events that might affect the success or failure of a proposed project.

30
Q

What are the drawbacks of simulation? (4)

A
  • It is not a technique for making a decision, only for obtaining more
    information about the possible outcomes.
  • Models can become extremely complex.
  • The time and costs involved in their construction can be more than is
    gained from the improved decisions.
  • Probability distributions may be difficult to formulate.
31
Q

What is expected values?

A

An expected value is a weighted average of all possible outcomes. It
calculates the average return that will be made if a decision is repeated
again and again.

32
Q

What is the formula for expected value?

A

The formula for the expected value is

EV = Σpx

33
Q

What is expected values useful for?

A

It is a useful decision rule for a risk neutral decision maker

34
Q

What are the advantages of expected values? (3)

A
  • Takes uncertainty into account by considering the probability of each
    possible outcome and using this information to calculate an expected
    value.
  • The information is reduced to a single number resulting in easier
    decisions.
  • Calculations are relatively simple.
35
Q

What are the disadvantages of expected values? (3)

A

-The probabilities used are usually very subjective.
-The EV is merely a weighted average and therefore has little meaning
for a one
off project.
-The EV gives no indication of the dispersion of possible outcomes
about the EV, i.e. the risk.
-The EV may not correspond to any of the actual possible outcomes.

36
Q

Why is a pay off table useful?

A

It is a useful way to represent and analyse a
scenario where there is a range of possible outcomes and a variety of
possible responses.

37
Q

What does a pay off table illustrate?

A

A pay
off table simply illustrates all possible
profits/losses.

38
Q

What is maximax?

A

The maximax rule involves selecting the alternative that maximises the maximum pay off achievable.

39
Q

Who is maximax aimed for?

A

Suitable for an optimist, or ‘risk
seeking’ investor,
who seeks to achieve the best results if the best happens

40
Q

What is maximin?

A

The maximin rule involves selecting the alternative that maximises the
minimum pay
off achievable.

41
Q

Who is maximin aimed for?

A

This approach would be appropriate for a risk
averse pessimist who seeks
to achieve the best results if the worst happens.

42
Q

What is the minimax regret rule?

A

The minimax regret strategy is the one that minimises the maximum regret

43
Q

Who is the minimax regret rule useful for?

A

It is useful for a risk

averse decision maker. Essentially, this is the technique for a sore loser who does not wish to make the wrong decision.

44
Q

What is a decision tree?

A

A decision tree is a diagrammatic representation of a multi
decision problem, where all possible courses of action are represented, and every
possible outcome of each course of action is shown.

45
Q

When should decision trees be used?

A

Decision trees should be used where a problem involves a series of
decisions being made and several outcomes arise during the decision
making process

46
Q

What does a decision tree force the decision maker to do?

A

Consider the logical sequence of events

47
Q

What is perfect information?

A

The forecast of the future outcome is always a correct
prediction. If a firm can obtain a 100% accurate prediction they will always
be able to undertake the most beneficial course of action for that prediction.

48
Q

What is imperfect information?

A

The forecast is usually correct, but can be incorrect. Imperfect information is not as valuable as perfect information.

49
Q

How is the value of information calculated?

A

Expected profit (outcome) WITH the information LESS Expected profit (outcome) WITHOUT the information

F5 Performance Management (15 decks)

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