Risk and Uncertainty (1) Flashcards
What is a risk?
Involves situations or events that may or may not occur, but whose profitability of occurrence can be calculated statistically
What are uncertain events?
Those whose outcome cannot be predicted with statistical confidence
Why does making decisions now affect future outcomes?
Managers preparing and implementing budgets now need to estimate figures to make decisions and set targets
Where does risk exist?
Where a decision-maker has knowledge that several different future outcomes are possible, due to past experience
How should decisions be taken?
With reference to risks involved and ivnestor’s attitude to risk
What is a risk seeker?
A decision maker who is interested in the best outcomes no matter how small the chance that they may oiccur
What is risk neutral?
Decision-maker who is concerned with what will be the most likely outcome
What is risk adverse?
The worst outcome might occur
Methods of obtaining research to combat market uncertainty
Market research
Focus groups
What is market research?
Systematic process of gathering, analysing and reporting about markets to explain a problem facing a company or organisation
What is a focus group?
May be used to obtain qualitative views and opinions from a small group of individuals
What happens when the final outcome of a decision is unknown and a range of possible future outcomes have been quantified
The msot likely probabilities can be assigned to these outcomes and a weighted average of these outcomes calculated
Whenf aced with a numebr of alternative decisions?
One with highest expected value should be chosen
Benefit of pay-off tables?
Identify and record all possible outcomes in situations where several decision options and the outcome from each decision depends on eventual curcumstances
Limitations of estimated value (long-term average)
EV is a long-term average and is therefore not suitable for one off decisions
