8 - Risk & Uncertainty Flashcards
what are the 3 attitudes a company can have towards risk?
- risk neutral
- risk averse
- risk seeker
what does standard deviation measure?
how all the different outcomes differ from E(V)
how do we calculate standard deviation?
(outcome - E(V))^2
sum up all of these and then square the outcome
why can we not use the SD in isolation?
it does not give us enough info for decision making. we can use coefficient of variation to solve this.
what do we use coefficient of variation for?
it is a relative measure of risk which takes into account the magnitude of profit
what would we do if we had perfect information?
we would buy / not buy for exact demand / conditions to avoid a loss
how do we calculate the value of perfect info?
Revised E(V) with perfect info less Original E(V)
what are the advantages of E(V)?
- simple
- easy decision making
- takes risk into account
what are the disadvantages of E(V)?
- subjective
- not useful for one offs
- ignore risk appetite
- need probabilities to answer
what is the Utility theory?
individuals will have a certain attitude towards risk that will depend on the amount of money involved
why should we not make a decision solely based on E(V)?
it ignores the range of all outcomes
what is the aim of Maximin?
to maximize your benefit in the worst possible scenario
what is the aim of Maximax?
to maximize your benefit should the best possible scenario occur
what is aim of the regret criterion?
to minimize the maximum possible regret
when do we use Maximin, Maximax, regret?
when we cannot apply meaningful probabilities to the alternatives
