Unit 2 Oppurtunity cost Flashcards
Opportunity Cost
The ‘real’ coat of taking a particular action or the next best alternative foregone in the next best thing you could have chosen but did not
Uncertainty
A situation in which there is a lack of knowledge and events, outcomes or consequences are predictable
Decision tree
A model that represents the likely outcomes for a business of a number of courses of action on a diagram showing the financial consequences of each
Probability
The chance of a particular event occurring
Expected values
Financial outcomes from a specific course of action adjusted to allow for the probability of it occurring
Node
A point in a decision tree where chance takes over. It is denoted by a circle and at that point it should be possible to calculate the expected value of this pathway
Risk
The chance of incurring misfortune or loss
Intuition
Ability to understand something without the need for conscious reasoning- similar to ‘hunch’ or ‘gut feel’
Short termism
A tendency within a business to focus on short term results, probably at the cost of long term success
Net gains
Expected values of a course of action minus the costs associated with it
Actual values
Forecasts of the net cash flows which result from the following sequence of decisions and the chance events through a decision tree. They should always been shown at the end branches of a tree
Ethics
Moral principles which should underpin business decisions and actions
Tactical decision
Deciding what to do in circumstances that are immediate (short term) and where a mistake is unlikely to have a major impact on the business.
Strategic decision
One that is made in circumstances of uncertainty and where the outcome will have a major impact on the medium to long term future of the organisation.
Scientific decision making
Based on data, a logical and research based approach to decision making
