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Risk and Uncertainty – ACCA Advanced Performance Management (APM)

VIVA

Risk and uncertainty is a topic on which you have been examined previously, but is deemed knowledge and it therefore repeated here as revision.

Decision making involves making decisions now which will affect future outcomes which are unlikely to be known with certainty.

Risk exists where a decision maker has knowledge that several possible outcomes are possible – usually due to past experience. This past experience enables the decision maker to estimate the probability or the likely occurence of each potential future outcome.

Uncertainty exists where the future is unknown and where the decision maker has no past experience on which to base predictions.

Whatever the reasons for the uncertainty, the fact that it exists means that there is no ‚rule‘ as to how to make decisions. For the examination you are expected to be aware of, and to apply, several different approaches that might be useful.

Risk preference

As will be illustrated by an example, the approach taken to make the decision will depend on the decision-makers attitude to risk.

A risk seeker will be interested in the best possible outcome, no matter how small the change that they may occur.
Someone who is risk neutral will be concerned with the most likely or ‘average’ outcome.

A risk avoider makes decisions on the basis of the worst possible outcomes that may occur.

Reader Interactions

Comments

  1. byron1976 says

    August 5, 2020 at 3:31 pm

    Dear Sir,
    I understand method Maximax, Minimax and regret i.e. how to calculate but don’t understand the application of it.

    From Question how i will spot what to do Maximax, minimax or Maximax regret, minimax regret?
    Plz help me

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  2. flower101 says

    October 20, 2018 at 10:02 am

    what is the answer for example 1 part e in risks and uncertainty questions.
    what is the most that john would be prepared to pay for perfect knowledge as to the level of normal demand.

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    • Ken Garrett says

      October 20, 2018 at 10:41 am

      It is covered in the lecture.

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      • gremxula says

        September 15, 2019 at 2:18 pm

        🙁 still cannot trace it in the lecture

      • Spiro says

        October 21, 2019 at 9:15 pm

        Answer: $300

        With perfect knowledge of the level of demand, the payoffs would be as follows:
        Perf. Contr. Payoff
        400 800u 4,400
        500 700u 4,600
        700 500u 5,000
        900 300u 5,400
        The expected return with perfect knowledge = (0.2 × 4,400) + (0.3 × 4,600) + (0.4 × 5,000) + (0.1 × 5,400) = $4,800
        The expected return without perfect knowledge is (d)(i) expected value $4,500
        The most to pay for perfect knowledge = 4,800 – 4,500= $300

  3. flower101 says

    October 20, 2018 at 9:09 am

    i don’t understand in the above example for 300 contract size and 400 demand units how do you get (300×3)+(400×5)= 2900 where does the 3 and 5 comes from.

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    • Ken Garrett says

      October 20, 2018 at 10:39 am

      Contributions.11-6 and 9-6.

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      • cathieno says

        December 4, 2019 at 3:58 am

        was wondering too.. glad i looked up the comments

  4. Jeet says

    May 2, 2018 at 7:18 am

    Wonderful Lecture. Thank you, Sir!

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  5. sharonchan87 says

    September 21, 2017 at 9:06 am

    I don’t understand how the possible profits are calculated. Still not able to get the same answers. Can anyone please advise?

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  6. somtochukwu says

    May 8, 2017 at 9:28 am

    Great

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    • John Moffat says

      May 8, 2017 at 11:40 am

      Thanks 🙂

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  7. kellyan says

    February 8, 2017 at 8:14 pm

    I do not understand , how the possible profits were calculated. Can someone give me an example for one.

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  8. Eve says

    October 30, 2016 at 7:02 am

    has anyone got an answer for question e) of Example 1 – about the price of perfect knowledge as to the level of normal demand?
    Thank you 🙂

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  9. wgk says

    December 8, 2015 at 6:42 am

    Love your comment (14:15) – “sort of person who will talk to you at breakfast” – beautiful. :))

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    • ryanb88 says

      March 10, 2020 at 12:06 pm

      it’s still here in 2020. Excellent.

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  10. danieljamesglover says

    September 12, 2015 at 3:05 pm

    Has anyone used these models in the work place?

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    • Hassan says

      March 6, 2016 at 12:03 am

      we use them every now and then, unknowingly though…..as the lecturer says, decision making would in many cases reflect the personality of the decision makers….we have risk takers, risk averse managers…

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  11. tamtam05 says

    August 24, 2015 at 12:38 pm

    What is the answer to question (e) ?

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    • mak7ali says

      November 3, 2015 at 8:37 pm

      Yes, i wanted to ask that as well! The perfect information one.. can you please tell the answer to that sir? 🙂

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  12. Martin says

    July 23, 2015 at 4:44 pm

    I love you matetrial they’re reachily good

    Log in to Reply
  13. namulondolydia says

    July 23, 2015 at 6:13 am

    Thanks, you have made this topic understandable

    Log in to Reply
  14. afridi9rizwan says

    May 12, 2015 at 10:00 am

    dear Sir,

    i cant seem to find the question unique components, can u please provide me with a link. i have a bpp kit and it doesnt mention it

    Log in to Reply
    • afridi9rizwan says

      May 12, 2015 at 10:38 am

      found it

      Log in to Reply
  15. JACOB says

    February 18, 2015 at 9:32 am

    I AM HAVING PROBLEM VIEW THE VIDEOS TODAY.
    IT APPEARS MY OFFICE HAS FILTER ALL VIDEO SITES.
    WHAT CAN I DO?

    Log in to Reply
    • opentuition_team says

      February 18, 2015 at 10:29 am

      Talk to your office about the problem

      Log in to Reply
    • raiseinheaven1 says

      August 30, 2015 at 2:05 pm

      or you can use some proxy servers 🙂

      Log in to Reply
      • notcle says

        November 18, 2015 at 4:19 am

        how do you use the proxy servers

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