Asset Management 2 Flashcards

1
Q

Daniel Bernoulli

A

most prominent scholar to research the theory of a good decision
- expected value = (odds of gain) x (value of gain)

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2
Q

two errors in decision making that people make

A
  • error in odds

- error in value

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3
Q

Error in odds

A
  • we use past experiences to estimate odds
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4
Q

Error in value

A
  • value is harder to estimate than odds
  • comparisons change the way we value things
    (supermarket example and concert ticket example)
  • about 90-95% of our decisions made on emotional instinctual levl
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5
Q

Why we make bad decisions

A
  • brains evolved for a different world than we live in (highest priority to eat and mate)
  • must learn how to un-learn our natural instinct
  • this is why we rely on experts for important decisions
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6
Q

MCA

A

Multi Criteria Analysis

  • decision techniquie that considers more than one criterion
  • commonly used where benefit to cost ratios are difficult to accurately define
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7
Q

Advantages of MCA

A
  • fast and dirty approaxh

- tool can be combined with others to become very powerful

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8
Q

Disadvantages of MCA

A
  • weighting factors often difficult to agree on by many parties
  • may be inconsistencies within weighting factors
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9
Q

MCA Method

A
  1. Select Decision Criteria or Indicators
  2. Identify weightings for each indicator
  3. Assess indicator value for each option
  4. Calculate overall results
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10
Q

AHP

A

Analytical Hierachy Process

  • in-depth pairwise comparison method
  • developed by Thomas Saaty in 1980s
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11
Q

Advantages of AHP

A
  • based on Mathematical Decision Theory and is an industry standard
  • generates ratio data
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12
Q

Disadvantages of AHP

A
  • labour intensive

- participants perceive the tool as a ‘black box’ if they do not understand the mathematical theory

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13
Q

Risk Based Decision Making

A

risk = probability x consequence

  • uses this technique to identify high risk areas that should be addressed
  • risk often used to balance the funding gap
  • understanding this gap will lead to better decision making
  • powerful when combined with Monte Carlo analysis
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14
Q

AHP Method

A
  1. Define objective and decision options
  2. Structure elements in criteria, sub-criteria, alternatives
  3. Make pairwise comparisons of elements in each group
  4. Calculate weighting and consistency ratio
  5. Evaluate alternatives according to weighting
  6. Evaluate Benefit Cost Analysis (BCA)
  7. Make Decision
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15
Q

BCA

A

Benefit Cost Analysis

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16
Q

Cognitive Fluency

A

how easy an idea is to process and understand

- e.g. stockmarket tags: SKY TAG vs PHJ KJM`

17
Q

Sunk Cost Fallacy

A

not leaving a bad movie before it ends as you feel that you paid for it

  • lose $20 ticket AND time, but if leave only lose $20 ticket
  • should focus on future costs/benefits
18
Q

Self Serving Bias

A

if we win it is our success, if we lose it is someone else’s fault

  • e.g. famous people vs you going to heaven
  • research shown when operating in groups decisions are more rational
19
Q

pseudo diagnostic information

A
  • information that you see that isn’t really relevant but you think it is
  • you see there is a correlation and imply there is causation
20
Q

subtlety diagnostic information

A

information that is important but you dont think it is

21
Q

Sorting Relevance

A

be aware of conformation bias: once you have decided on something, new information has less of an impact

  • you either blow it off
  • or you interpret information so that it is favourable to you
22
Q

Inside view

A

always optimistic and thinks things are great

23
Q

outside view

A

often gives a less optimistic view

24
Q

think up-down

A

aims - conclusions

actions - causes

25
Q

think bottom up

A

conclusions - aims, methods etc

causes - actions

26
Q

Delphi Method

A
  • when AHP too labour intensive for participants

- panel of experts answer questionnairs and revise answers after interaction with other panel experts