Chapter 5

Question 1

what are exogenous variables

Answer 1

variables that are determined externally, for example the cost of a raw material imposed by the supplier

Question 2

what is uncertainty

Answer 2

when the future is unknown and the decision maker has no past experience on which to base predictions of change so that outcomes cannot be predicted, or assigned probabilities

Question 3

what is risk

Answer 3

where a decision maker has knowledge that several different future outcomes are possible, the probabilities of which are known, or can be estimated, usually due to past experience

Question 4

limitations of EV

Answer 4

ignores attitudes to risk

dependant on probability that may be unreliable

Question 5

who are risk seekers

Answer 5

someone who wants to secure the best outcomes, no matter how small the chance is that it will occur

Question 6

who are risk neutrals

Answer 6

if they are concerned on most likely outcome

Question 7

who is risk adverse

Answer 7

act on the assumption that the worst outcome might occur

Question 8

what is maximax

Answer 8

looks at best results from each decision option and selects the one with the best result

Question 9

what is maximin

Answer 9

selects an alternative decision that offers the least unattractive worst outcome

Question 10

what is minimax regret

Answer 10

aims to minimise regret from making the wrong decision

Question 11

what is joint probability

Answer 11

the probability of 2 events occurring at the same time and is calculated by multiplying together the probability of each individual variable occurring