Chapter 13: Risk and Uncertainty in the short-term Flashcards

1
Q

Is risk quantifiable or unquantifiable?

A

Quantifiable (outcomes have associated probabilities)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Is uncertainty quantifiable or unquantifiable?

A

Unquantifiable (outcomes cannot be mathematically modelled)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is an expected value?

A

Summarises all the different possible outcomes by calculating a single weighted average. It is the long run average (mean)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

How do we calculate the EV (Expected Value)?

A

Σpx (p=probability of the outcome occurring, x=the future outcome)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What do pay off tables show?

A

Profits that can be made from different possible outcomes. There are two factors to consider - demand and supply.
Table shows the different profits from each different contribution of demand and supply.
Probabilities are used on these different profit levels to calculate profits.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the advantages of using expected values?

A

Takes risk into account
Easier decisions
Simple

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the disadvantages of using expected value?

A

Little meaning for a one-off project
Ignores attitudes to risk
The answer may not exist

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What does someone that is risk averse aim for?

A

Best possible outcome in the worst case scenario. Maximin.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What does someone who is risk neutral ignore and aim for?

A

The range of outcomes and aim for the highest EV. Expected Value.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What does someone who is a risk seeker aim for?

A

Best possible outcome in the best case scenario. Maximax.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How do you calculate Maximin?

A

Determine the minimum payoff under each supply level.
Choose the supply level with the maximum of those values.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How do you calculate maximax?

A

Determine the maximum payoff under each supply level.
Choose the supply level with the maximum of those values.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What does a person who is risk averse and a sore loser aim for?

A

Aim to minimise the regret from making a bad decision. Minimax regret

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

How do you calculate minimax regret?

A

Find maximum the payoff in each demand row.
Compare the actual payoff with ‘what we could have earned’
Create a regret table with the values in
Determine the maximum regret for each supply level
Choose the supply level which gives the minimum of those values

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

How do we calculate standard deviation?

A

Compares all the actual outcomes with the expected value. It then calculates how far on average the outcomes deviate from the mean.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

If we have two project with very different EVs and it is not easy to compare their standard deviation what do we use?

A

Coefficient of variation

17
Q

How do we calculate coefficient of variation?

A

Standard deviation / mean (EV)

18
Q

What is the number give in normal distribution tables known as?

A

z score

19
Q

How do we calculate the z score?

A

(x - μ) / σ (x=value being considered, μ=mean, σ=standard deviation)

20
Q

Once we calculate the z score what table do we look it up on?

A

Normal distribution table

21
Q

What does decision trees force the decision make to consider?

A

Logical sequence of events.

22
Q

What does a decision tree do to solve complex problems?

A

Break them down into smaller, easier-to-handle sections

23
Q

What does the square represent in a decision tree?

A

A decision point

24
Q

What does the circle represent in a decision tree?

A

A chance point

25
Q

What is the value at the point of the square in a decision tree?

A

highest possible expected value from the options being considered

26
Q

What is the value at the point of the circle in a decision tree?

A

Expected value (based on the probabilities) of the outcome possible from this point forward