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)
2
Q
two errors in decision making that people make
A
- error in odds
- error in value
3
Q
Error in odds
A
- we use past experiences to estimate odds
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
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
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
7
Q
Advantages of MCA
A
- fast and dirty approaxh
- tool can be combined with others to become very powerful
8
Q
Disadvantages of MCA
A
- weighting factors often difficult to agree on by many parties
- may be inconsistencies within weighting factors
9
Q
MCA Method
A
- Select Decision Criteria or Indicators
- Identify weightings for each indicator
- Assess indicator value for each option
- Calculate overall results
10
Q
AHP
A
Analytical Hierachy Process
- in-depth pairwise comparison method
- developed by Thomas Saaty in 1980s
11
Q
Advantages of AHP
A
- based on Mathematical Decision Theory and is an industry standard
- generates ratio data
12
Q
Disadvantages of AHP
A
- labour intensive
- participants perceive the tool as a ‘black box’ if they do not understand the mathematical theory
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
14
Q
AHP Method
A
- Define objective and decision options
- Structure elements in criteria, sub-criteria, alternatives
- Make pairwise comparisons of elements in each group
- Calculate weighting and consistency ratio
- Evaluate alternatives according to weighting
- Evaluate Benefit Cost Analysis (BCA)
- Make Decision
15
Q
BCA
A
Benefit Cost Analysis
