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sir i also have another doubt, why is the following statement true?
EV takes uncertainty into account by considering the probability of each possible outcome and using this information to calculate an EV.
Sir should not the statement have been, “EV takes risk into account…”
because its risk where we are aware about probabilities of different possibilities, isn’t it sir? whereas in case of uncertainty we are not aware about the varied probabilites of different possibilites
many thanks
Uncertainty is when we are not sure what the outcome will be.
Risk is where there is uncertainty but where we know the probabilities of the uncertain outcomes.
Expected values themselves do not take the risk into account – you could have a choice between two decisions which both have the same expected values but completely different levels of risk. Separately, the risk is measurable when we know the probabilities, but measuring it is not in the syllabus for Paper PM.
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