risk and uncertainty Flashcards
difference between risk and uncertainty
with uncertainty outcomes cannot be reliably identified vice versa with risk
when do rational decision makers accept additional risk
if they believe there is an acceptable chance of higher reward
risk seeking
Decision makers who are interested in achieving the best possible outcomes
* Optimistic
* High appetite for risk
risk adverse
Acts on the assumption that unfavourable outcomes will happen.
* Pessimistic
* Low tolerance of risk
risk neutral
Base their decisions on the most likely outcome
* Also interested in expected values.
what is formula for expected value
∑px
what Is the expected value of a set of outcomes
the average of all the identified outcomes weighted by their probabilities
what do pay off tables do
identify and record all possible outcomes in situations where there are several decisions options and the outcomes form each decision depends on the certain non controllable circumstances
maximax
- select the option that has the most favourable best outcome
- risk- seeking strategy
maximin
- select the option that has best worst outcome
- risk adverse strategy
minimax regret
- select the option that avoids the most regret
- regret is the profit lost because you didn’t choose the best option for a particular outcome
- FOMO approach
how can risk be qualified
using standard deviation
what does SD measure
how diapered a set of numbers are
what is formula for SD
sqrt (∑(𝒙 − 𝝁)^𝟐)/n
𝑥 = each possible outcome
𝜇 = mean (EV)
𝑛= number of outcomes
what does the coefficient of variation give us
the SD of the mean
