Chapter 11 Flashcards
Methods of improving precision
Focus groups
Market research
Mystery shopping
Uncertainty
Definition
Weather could be a range of future possible outcomes, but there is no basis on which probabilities can be estimated (e.g. no past experience)
Risk
Definition
Where are number of possible outcomes resulting from a decision or event. Past experience allows the estimation of probabilities that can be assigned to the possible outcomes e.g. rolling a dice of flipping a coin.
Stress, testing
Definition
Looking at how financial projections will be affected by major developments.
The aim is to see how robust forecasts are.
Simulation techniques
Definition
Statistical techniques for stimulating potential outcomes in situations where there are multiple uncertain variables improbabilities can be attached to them.
What if analysis with multiple variables
MaxiMax
Maximising the maximum achievable profit.
This is the approach of optimists or risk seekers.
Maximin
Maximising the minimum achievable profit.
This is the approaches by pessimists – risk averse.
Minimax regret
Minimising the maximum regret of making the wrong decision
Sensitivity analysis
Profit level divided by variable (revenue or cost) multiplied by 100
Can we use to calculate the maximum percentage change in a variable before the decision would change
Problems with sensitivity analysis
Only one variable at a time can be analysed winner practice a number of arrival is my change
Making a decision based on sensitivity analysis will be difficult. If you do not know the probability of the variables changing 
Expected value
A weighted average calculation, using the probabilities of each outcome as the basis of the waiting.
Every school neutral investor will generally make the decision on the basis of maximising the EV.
VOPI
Value of perfect information
How much you would pay someone if they’re able to give you perfect information
Expected value (with perfect information) minus expected value (without perfect information)
Decision tree
Definition
Victoria method of showing a sequence of interrelated decisions and expected outcomes. Decision trees can incorporate both the probabilities of advise of expected outcomes and I used in decision-making.
Standard deviation
I statistical measurement of volatility. Images how widely values range from the average value (expected value).
Since it is a measure of volatility, it gives us a good indication of the overall risk in decision-making.
The coefficient of variation
News in order to compare the relative risks of projects by calculating the ratio of the standard deviation to the expected value 
