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APM

Risk and Uncertainty - ACCA Advanced Performance Management (APM)

VIVA Subject Guide

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.

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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.

27 Comments

  1. byron1976
    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
  2. flower101
    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.
  3. kengarrettTutor
    It is covered in the lecture.
  4. Gremxula
    :( still cannot trace it in the lecture
  5. SpiroSupporter
    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
  6. flower101
    i don't understand in the above example for 300 contract size and 400 demand units how do you get (300x3)+(400x5)= 2900 where does the 3 and 5 comes from.
  7. kengarrettTutor
    Contributions.11-6 and 9-6.
  8. cathieno
    was wondering too.. glad i looked up the comments
  9. Jeet
    Wonderful Lecture. Thank you, Sir!
  10. somtochukwu
    Great
  11. John MoffatAdmin
    Thanks :-)
  12. kellyan
    I do not understand , how the possible profits were calculated. Can someone give me an example for one.
  13. Eve
    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 :)
  14. wgk
    Love your comment (14:15) - "sort of person who will talk to you at breakfast" - beautiful. :))
  15. Ryan
    it's still here in 2020. Excellent.
  16. Daniel
    Has anyone used these models in the work place?
  17. Hassan
    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...
  18. tamtam05
    What is the answer to question (e) ?
  19. Crazed Guy
    Yes, i wanted to ask that as well! The perfect information one.. can you please tell the answer to that sir? :)
  20. Martin
    I love you matetrial they're reachily good
  21. namulondolydia
    Thanks, you have made this topic understandable
  22. afridi9rizwan
    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
  23. afridi9rizwan
    found it
  24. JACOB
    I AM HAVING PROBLEM VIEW THE VIDEOS TODAY.
    IT APPEARS MY OFFICE HAS FILTER ALL VIDEO SITES.
    WHAT CAN I DO?
  25. opentuition_teamAdmin
    Talk to your office about the problem
  26. raiseinheaven1
    or you can use some proxy servers :)
  27. notcle
    how do you use the proxy servers

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