ch 17

Question 1

risk averse

Answer 1

back of price, might not pay cost. they need price tags below expected value

Question 2

risk neutral

Answer 2

would pay the expected value, comfortable paying this, would rather pay for free but is ok with 60

Question 3

risk loving

Answer 3

opposite of risk averse, will pay over the expected value

Question 4

risk averse individuals buy

Answer 4

insurance

Question 5

random variables

Answer 5

a variable whose values (outcomes) are random and therefore unknown. The distribution of possible outcomes, however, is known or estimated. Random variables are used to explicitly take account of uncertainty.

Question 6

If a deal seems too good to be true

Answer 6

it probably is.

Question 7

The expected value of an uncertain outcome is:

a. The sum of the probabilities and random variables	
b. The product of the probabilities plus random variables	
c. The product of the probabilities and random variables	
d. The sum of the probabilities times the random variables

Answer 7

d. The sum of the probabilities times the random variables

Question 8

If your uncle offers you a deal with an expected value much greater than your cost to take part:

a. Your uncle may have undervalued the likelihood of the deal going bad	
b. Your uncle may have underestimated the value of the project in the worst case scenario	
c. Your uncle may have overvalued the likelihood of the deal being successful	
d. All of the above

Answer 8

d. All of the above

Question 9

You have to choose between risky options A and B. You calculate the expected value of A is greater than the expected value of B by 0.013%. Your likely course of action is:

a. Choose A because it is obviously higher	
b. Choose B because it is obviously higher	
c. Flip a coin because it is unlikely your probability estimates are this precise	
d. Choose neither you are stumped

Answer 9

c. Flip a coin because it is unlikely your probability estimates are this precise

Question 10

selection bias

Answer 10

occurs when the treatment group differs systematically from the control group

Question 11

You have to decide whether to sell widgets for $5 or $6 when your marginal cost is $3. In the past, you have had 15% success making the sale at the $5 price and only 10% success at the $6 price:

a. The $5 price yields higher profits	
b. Both prices earn the same profits	
c. The $5 price yields higher profits	
d. Neither price earns profits

Answer 11

b. Both prices earn the same profits

Question 12

You have to decide whether to sell widgets for $5 or $6 when your marginal cost is $3. In the past, you have had 15% success making the sale at the $5 price and only 10% success at the $6 price. You might increase your profits by:

a. Setting a $6 price but offering a $1 discounts if customers begin to break off negotiations.	
b. Listing a price of widgets at $5 but tacking on a $1 premium if customers agree quickly.	
c. Randomly alternating between the $5 and $6 prices.	
d. Setting a $7 price and offering a $1 discount to all customers.

Answer 12

a. Setting a $6 price but offering a $1 discounts if customers begin to break off negotiations.

Question 13

Selection bias occurs:

a. Because there are systematic differences between the treatment group and the control group that also affect the outcome.	
b. Because there are random differences between the treatment group and the control group that also affect the outcome.	
c. In randomized controlled experiments.	
d. Less often in analyses of observational data than in experiments

Answer 13

a. Because there are systematic differences between the treatment group and the control group that also affect the outcome.

Question 14

Randomized experiments represent the “gold standard” in data analytics because:

a. Systematic differences between treatment and control groups generate selection bias.	
b. Selection bias is eliminated since there are no systematic differences between treatment and control groups.	
c. Analyses with observational data are worse because they are always biased.	
d. Data scientists want to be considered as legitimate as laboratory scientists.

Answer 14

b. Selection bias is eliminated since there are no systematic differences between treatment and control groups.

Question 15

The key determinant of a careful observational study is:

a. The treatment group is created after the fact to be similar to a predetermined the control group.	
b. There are still some unexpected differences between the treatment group and the control group that generate selection bias.	
c. The control group is created to mimic the treatment group without systematic differences.	
d. Control groups are determined by some factor that also can affect the outcome

Answer 15

c. The control group is created to mimic the treatment group without systematic differences.

Question 16

If your analysis leads you to reject a hypothesis that is actually correct:

a. You are committing at Type II error.	
b. You are responding to a false positive.	
c. You are committing a Type I error.	
d. You are not observing a false positive.

Answer 16

c. You are committing a Type I error.

Question 17

A manager will decide to fund too few projects with uncertain outcomes if:

a. Project failures are readily known to the manager's supervisor.	
b. Passed on opportunities never get exposed.	
c. Manager reviews do not include evaluations projects that were passed over.	
d. All of the above.

Answer 17

d. All of the above.

Question 18

The difference between risk and uncertainty is:

a. Uncertainty can be modeled with probabilities and statistics.	
b. Risk refers to the state of the world that are completely unforeseen.	
c. Risks are accurately calculated even when we cannot estimate some important outcomes.	
d. None of the above.

Answer 18

d. None of the above.

Question 19

A way to deal with uncertainty is:

a. Give a large probability to states you have not listed.	
b. Keep plans rigid to gather information about outcomes that were unforeseen.	
c. Because contingencies can occur that had not been anticipated, one should add enough flexibility into your strategy that permits responding as they emerge.	
d. None of the above.

Answer 19

c. Because contingencies can occur that had not been anticipated, one should add enough flexibility into your strategy that permits responding as they emerge.

Question 20

When you’re uncertain about the costs or benefits of a decision…

Answer 20

assign a simple probability distribution to the variable and compute expected costs and benefits.

Question 21

When customers have unknown values, you face a familiar trade-off:

Answer 21

price high and sell only to high-value customers, or price low and sell to all customers.

Question 22

If you can identify high-value and low-value customers, you can price discriminate and avoid the trade-off. To avoid being discriminated against, high-value customers will try to mimic the behavior and appearance of low-value customers

Answer 22

you can price discriminate and avoid the trade-off.

Question 23

To avoid being discriminated against, high-value customers will try to ______ the behavior and appearance of low-value customers

Answer 23

mimic

Question 24

Decisions are increasingly being driven by ________

Answer 24

data analytics.

Question 25

When possible run _________.

Otherwise, consider how ____________ between the control and treatment group might generate selection bias that limits the usefulness of the analysis.

Answer 25

randomized experiments.

Systemic differences

Question 26

If you are facing a decision where one of your alternatives would work well in one state of the world but not in the other, and you are uncertain about which state of the world you are in, think about _______________.

Answer 26

how to minimize expected error costs.

Question 27

Because failed initiatives are visible, but never-attempted initiatives are not, _________.

Answer 27

guard against employees becoming too cautious.

Question 28

Risk can be: _________, __________, and _________. Uncertainty cannot.

Don’t mistake risk for uncertainty, and try to design institutions flexible enough to deal with unforeseen contingencies.

Answer 28

quantified, estimated, and hedged.