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Risk and Uncertainty - Minimax regret, Expected values - ACCA Performance Management (PM)

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36 Comments

  1. Max
    Thank you for another great lecture.

    When you gave the lottery ticket example, I as a maths graduate saw the numbers and immediately thought "I'd buy every ticket I could possibly get my hands on"!
  2. Szilvia
    Hi sir. I was just wondering, when calculating the expected values, shouldn't we only apply the probabilities to the expected demand, multiply by $5 (profit) then add the expected profit of the contract. If the contract states fixed number of units purchased each month, why do you apply the probabilities to those too? Thank you for your response.
  3. John MoffatTutor
    Try it yourself and see if you get the same result :-)
  4. Kumar
    Dear Sir,
    Just want to double check, when we calculate the expected value, do we need to multifiy the revenue from agreed contract by the probability. I think it is a known income and certain.
  5. John MoffatTutor
    You can either multiply the total revenue by the probabilities, or alternatively you can calculate the 'normal' revenue by the probabilities and then add the income from the contract. The end result is the same.
  6. Kumar
    Many thanks for the clarification Sir!
  7. John MoffatTutor
    You are welcome :-)
  8. Ibrahim
    Dear John,
    Thank you so much actually I do appreciate you lecture lessons which is very useful open-tuition is very useful site it gave me motivation to start studying on my own as I can't afford physical classes and also i don't have that much spare time instructors like you was the reason to introduce to ACCA and trying to groom my capabilities as much as i can i think the best thing in life is free thank you my dear
  9. John MoffatTutor
    Thank you for your comment :-)
  10. naholom1990
    Thank you very for the lecture.
    I think I have an understanding of the minimax regret now. i have been struggling with it for the most part of my exam preparation. So the main point to keep in mind is that we want to minimize our maximum regret. And we do that by calculating regrets at each possible decision we make. So what we basically saying is that if we make our best choice we have no regret, but any other choice then that, then there will be an opportunity to maximise our returns forgone and hence the regret. I am just trying to check if I grasp the concept.
  11. adch111
    Hi,

    Does the expected value look at the probability of our uncertain demand in relation to different contract amounts? Also why do we multiply the sum of the contract value and uncertainty by the probability when the contract would mean 100% demand of the set contract units. Does the probabilities not only affect the uncertain demand profits?

    Thanks
  12. John MoffatTutor
    The probabilities only relate to the uncertain demand (in this question the normal demand). The contracted amount is our choice and is not uncertain, but whatever amount we decide to sign the contract for the eventual outcome will depend on the level of normal demand that occurs.
  13. adch111
    Okay that makes sense. Thanks!
  14. Bisola
    Hi sir John,
    why are we using normal demand in calculating the regret rule but used contract sizes for maximax and maximin. if we used the contract sizes then the regret value for contract size 800 should have been zero all through. Please explain
  15. John MoffatTutor
    We are not using normal demand to make the decision.
    It is when creating the regret table in the first place that we look at how much is lost in each case had we made the 'wrong' decision.
  16. ellesouth16
    Sir! Regarding your lecture in solving for the minimax in Demand of 900 in our regret table, the difference of 5000 and 4600 is 400. Did I miss a point of how it got an 800 difference?
  17. nt90
    Hi ellesouth16,
    in the case of the demand of 900 units, instead of deducting 4,600 from 5,000, we should use 5,600 instead. And that is how we got the difference of 800.
  18. Sooraj
    Hi John,
    On Expected values with probabilities (referring to the example question in your lecture video), shouldn't we be applying the probability to the normal demand customers alone, instead of total demand?
    Thank You.
  19. John MoffatTutor
    No. We apply the probabilities to the final outcomes in $'s (not to the demand) and the final outcomes depend on both the normal demand and the contract agreed.
  20. ruhina
    Respected sir,
    There’s a lot question of expected values in BPP.
    A manager has to choose between exclusive option c and d
    But the way they answered Is not shown in the book except the final answer which is option c m,
    But I really don’t know how they have calculated it kindly help me regarding this question
  21. John MoffatTutor
    How can I help you if I don't know which question you are referring to?
    Please ask in the Ask the Tutor Forum (not here) but tell me which question.
  22. Tan
    Hi John

    I am confused. Which one we should focus? choices or the uncertainty?
  23. John MoffatTutor
    I assume you are referring to the preparation of the regret table. If so, then for each uncertain item (the level of normal demand) we calculate the regret for each of the possible choices.

    I do suggest you watch the lecture again because I do spend time explaining.
  24. Sina
    Hi dear john
    I watched your lecture and that was really helpful for me except the last point you coverd was about expected value
    I couldnt get what is the correct definition of probability
    at first My thought was about it is a rate that shows there is a risk that our normal demand might be 0.X possible of the total
    And so we should just multiply it by our normal expected profit and Because the contract is not
    probable and it is guaranteed, its profit should be fixed and unchanged
    But here as a consequence you considered the probability rate is multiplied by both normal and contracted demand.
    I think i got somethinge wrongly
    So would you please show me the right logic

    Thanks for your lectures...
  25. ZfromUK
    Question 9 in the BPP question and practice kit has it with negative numbers. It was profit margin as the exam, so had to add it. For example, option 2 was -8 and best for that demand was 4. Therefore, answer was -12. In order to get the best it was out by -12.

    I hope I am making sense, sorry.
  26. John MoffatTutor
    Question 9 in the current edition of the BPP Kit is nothing to do with uncertainty - tell me the name of the question and I will see if it is the current edition.

    However, the regret table - by definition - is showing 'losses', so we never show them as negatives (you cannot have negative regret :-) )
  27. ZfromUK
    It’s called Sweet Cicely Sept/Dec 2017 past paper question
  28. John MoffatTutor
    There is no question in the current edition of the BPP Revision Kit called Sweet Cicely, and there is no published question from the actual Sep/Dec 2017 exam on risk and uncertainty.
  29. damiakin
    Hi John, thank you for this lecture/ for minimax regret,how do we work it out if we have negative values please? instead of subtracting the max regret, do we add?
  30. John MoffatTutor
    But you won't ever have negative values in the table (the regret is the difference between the best result and the actual result).
  31. damiakin
    Thank you very much sir.
  32. John MoffatTutor
    You are welcome :-)
  33. alie2018
    Thanks John. Well understood. The minimax regret approach looks at the minimum of the maximum regret and is used by someone who is a risk avoider.

    Expected value looks at the average return of the outcomes (contract is sign for the outcome with the highest return) and is an approach used by someone who is risk neutral. Such an individual make decision based on the most likely or average outcome that may occur.
  34. John MoffatTutor
    Correct :-)
  35. Avery
    hi sir, for minimax regret
    do we ignore the contract sizes here?
    and only focus on the uncertain demand?
  36. John MoffatTutor
    It is the contract size that we are choosing.

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