Dealing with Risk

Question 1

What is risk?

Answer 1

Risk is uncertainty that cannot be quantified

Question 2

What is uncertainty

Answer 2

Predictions cannot be made for an event to happen or not and depend on personal risk appetite

Question 3

What is the maximin (risk averse)?

Answer 3

Assume the worst possible outcome likely to happen meaning that the best worst is chosen

Question 4

What is the maximax (risk seeker)?

Answer 4

Assume the best possible outcome likely to happen meaning that the best best is chosen

Question 5

What is the minimax regret (risk-neutral)?

Answer 5

Avoid the biggest regret possible

Question 6

The value of perfect information formula

Answer 6

perfect expected values - imperfect expected values

Question 7

Why are decision trees used?

Answer 7

They help to better understand the value of plans that require multiple decisions

Question 8

Decision tree steps

Answer 8

Each outcome should have a value and probability
Calculate the expected value at each outcome point
Start with outcome points on the right
Select the decision with the highest expected value

Question 9

What is standard deviation used for?

Answer 9

Forecasting a range of values which increases the chance of being right