Risk And Uncertainty Flashcards
1
Q
What’s the formula for Expected Value?
A
EV = V * P
2
Q
Name 2 pros of expected value
A
- Calculations are simple
- Info is a number so easier decision making
- Shows the long run average outcome of a decision which is repeated time and time again
3
Q
Name 2 cons of Expected Value
A
- Isn’t the actual outcome
- Subjective probabilities
- W/A means nothing in a one-off situation
- Gives no indication of possible outcomes
- Assumes decision-makers are risk neutral
4
Q
What are the 3 attitudes to risk?
A
Risk averse, seeking and neutral.
5
Q
What do risk averse people prefer?
A
A certain outcome.
6
Q
What do risk seeking people prefer?
A
Not risk itself, but would do a high-risk move.
7
Q
What does a risk neutral person prefer?
A
A single value that represents the situation
8
Q
Formula for sensitivity to selling price?
A
Profit / Cashflow affected by change
9
Q
Formula for value of perfect information?
A
PI = EVPI - EVNPI
10
Q
2 pros of sensitivity analysis
A
- Simple
- Identifies crucial areas
11
Q
2 cons of sensitivity analysis
A
- Assumes changes to variables are independent
- Identifies variable change but not probability
- Provides info but not the decision
