Lecture 1

Question 1

Sources of Risk

Answer 1

(New) technology
Medicine
Finance
Relationships

Question 2

Effects of risk

Answer 2

immediate/delayed
direct/indirect
material/psychological
non-/voluntary
personal/environmental
single/recurring

Question 3

Risk characteristics

Answer 3

Controllability
Equitability
Perceived threat
Reversability
Threat to values
Trustworthiness of those in charge of managing risks

Question 4

Risk decisions and decision making

Answer 4

Choosing amongst alternative courses of action
Risk are associated with the outcomes of the courses of action
Courses of action need to be described in an order of desirability

Question 5

Definition of risk

Answer 5

Risks threaten things that we value

Question 6

DEcision under risk

Answer 6

Choosing courses of action to reduce the threat posed by risks depend on:

• the options available
• the outcomes of those options
• beliefs about the certainty of those options

Question 7

What are the perspectives on risk?

Answer 7

Normative
Descriptive
Prescriptive

Question 8

What is normative perspective on risk?

Answer 8

Rational decision-making
Making correct choices IF:
-the DM is fully informed
-the DM is in touch with values
-the DM follows consistent rules

Question 9

Risk according to the normative perspective

Answer 9

Risk exists where there is more than one possible outcome of a decision
Risk is described as a probability (%), which is assigned to outcomes of decisions

Question 10

What is risk analysis?

Answer 10

Risk analysis establishes probabilities through various means determines the benefit of each outcome ranks the outcomes from ”best” to ”worst”

Question 11

Some key points on risk analysis

Answer 11

The usefulness of historical risk data
Common concepts in risk analysis:
Risk or uncertainty: Risk = objective measures of outcomes
Uncertainty = subjective measures of outcomes

Question 12

The descriptive perspective

Answer 12

The study of practical decision making
Actual choices
Imperfect
Heuristic decision rules

Question 13

One source of heuristics?

Answer 13

Bounded rationality

• approximate optimization
• satisficing

Question 14

Prescriptive perspective

Answer 14

About being as rational as possibleusing management tools ”risk management”
Bridging the gap between normative and descriptive, in this course: The finance of innovation, risks

Question 15

Risk decisions

Answer 15

Making decisions about risk in practice
Basic elements:
-(available) options, outcomes, uncertainties
-set in a social context
-framed in a language highlighting certain aspects of the decision

Question 16

The social context of decisions

Answer 16

Decisions made in organizations (firms) and government
The role played by people’s (officials’)… :
-Values-beliefs on outcomes
-emotions
-social pressures
-limited capacity to make rational decisions when they respond to risk

Question 17

Framing of risky decisions

Answer 17

The language used when managing risks emphasizes certain aspects of risks
Language is used to communicate what:-is valued-choices exist-what the options are

Question 18

Decision making value assumption

Answer 18

The analysis of investment decisions is based on notions that people behave rationally, or accurately maximize expected utility, and are able to process all available information.

Question 19

Analyzing the following risks:

Answer 19

Investment costs
Operational costs
Schedules
Market deliveries and regularity
Technology development
Environemental aspects
Safety aspects
External factors

Question 20

Investment decisions under risk

Answer 20

Investing under the threat posed by risks depend on:

• the options available
• the outcomes of those options: cash flows
• DM beliefs about the certainty of those options
• a consistent decision rule
• set in a business context, determines values, rates of return