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.
byron1976 says
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
flower101 says
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.
Ken Garrett says
It is covered in the lecture.
gremxula says
🙁 still cannot trace it in the lecture
Spiro says
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
flower101 says
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.
Ken Garrett says
Contributions.11-6 and 9-6.
cathieno says
was wondering too.. glad i looked up the comments
Jeet says
Wonderful Lecture. Thank you, Sir!
sharonchan87 says
I don’t understand how the possible profits are calculated. Still not able to get the same answers. Can anyone please advise?
somtochukwu says
Great
John Moffat says
Thanks 🙂
kellyan says
I do not understand , how the possible profits were calculated. Can someone give me an example for one.
Eve says
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 🙂
wgk says
Love your comment (14:15) – “sort of person who will talk to you at breakfast” – beautiful. :))
ryanb88 says
it’s still here in 2020. Excellent.
danieljamesglover says
Has anyone used these models in the work place?
Hassan says
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…
tamtam05 says
What is the answer to question (e) ?
mak7ali says
Yes, i wanted to ask that as well! The perfect information one.. can you please tell the answer to that sir? 🙂
Martin says
I love you matetrial they’re reachily good
namulondolydia says
Thanks, you have made this topic understandable
afridi9rizwan says
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
afridi9rizwan says
found it
JACOB says
I AM HAVING PROBLEM VIEW THE VIDEOS TODAY.
IT APPEARS MY OFFICE HAS FILTER ALL VIDEO SITES.
WHAT CAN I DO?
opentuition_team says
Talk to your office about the problem
raiseinheaven1 says
or you can use some proxy servers 🙂
notcle says
how do you use the proxy servers