Risk and Decision Making

Question 1

Risk

Answer 1

several possible outcomes but the probabilities can be quantified

Question 2

Uncertainty

Answer 2

possible outcomes and probabilities are unknown

Question 3

Techniques for handling uncertainty

Answer 3

~ maximum payback period
~ increasing discount rate
~ assessing best and worst to get a rnage of outcome
~ sensitivity analysis - measure the margin of safety

Question 4

Sensitivity analysis

Answer 4

= 100% x NPV/ PV of cash flow subjects uncertainty

Question 5

Sensitivity analysis: Advantages (3)

Answer 5

~ facilitate subjective judgements
~ identifies areas critical to success
~ straightforward

Question 6

Sensitivity analysis: Disadvantages (4)

Answer 6

~ only on factor can be analysed
~ assumes changes to variables occur independently (they always link)
~ identifies how far a variable needs to change, but not the probability
~ doesn’t point to the correct decisions, just provides info

Question 7

Linear regression: Advantages

Answer 7

~ simple to use
~ easy to explain
~ predict impact of expanding variables

Question 8

Linear regressions: Disadvantages

Answer 8

~ not always a linear relationshisp betwn variables
~ doesn’t consider multiple variables
~ data collected may be inaccurate

Question 9

Types of predictive analytics

Answer 9

~ linear regression
~ decision trees
~ simulation
~ prescriptive analysis

Question 10

Linear regression

Answer 10

quantifies relationship between a dependent and independent variable

Question 11

Decision trees: Advantages

Answer 11

~ easy to explain and use

~ analyse diff outcomes baced on multiple variables

Question 12

Decision tree: Limitations

Answer 12

~ variables have to be simple

~ large decision trees can be difficult to understand

Question 13

Simulation

Answer 13

allows the effect of more than one variable changin at the same time to be assessed
e.g. Monte Carlo simulation

Question 14

Simulation: Disadvantages

Answer 14

~ provides info, not decision
~ expensive
~ relies on assumptions that might not be true (relating to probability distributions and relationships

Question 15

Simulation: Disadvantages

Answer 15

~ provides info, not decision
~ expensive
~ relies on assumptions that might not be true (relating to probability distributions and relationships

Question 16

Monte Carlo Simulation

Answer 16

the use of random numbers and probability statistics to investigate problems

Question 17

Simulation results:

Answer 17

Higher average NPV = more risky
Lower average NPV = less risky
~ decision dependent on attitude risk

Question 18

Prescriptive analytics

Answer 18

combining statistical tools used in predictive analysis with AI and alogrithms

Question 19

Prescriptive analytics: Advantages

Answer 19

can identify the optimum decision by incorporating multiple variables

Question 20

Prescriptive analytics: Disadvantages

Answer 20

~ creating models is complex and requires speicifc skills

~ relaibility of model depends on reliability fo data + past-present relationships

Question 21

Expected value: Advantages

Answer 21

~ easy to understand

Question 22

Expected value: Disadvantages

Answer 22

~ probabilities can be difficult to estimate
~ average may not correspond to any possible outcomec
~ gives no indication of the spread of possible events