Decisions that the company has made under certainty using primary and secondary data.
Full Answer Section
Slide 3:
- Primary data: Data collected by the company itself.
- Secondary data: Data collected by others and published in books, journals, or online databases.
Slide 4:
- Risk measurement: The process of assigning probabilities to future outcomes.
- Tools for risk measurement: Expected value: The average of all possible outcomes, weighted by their probabilities.
- Variance: A measure of how spread out the possible outcomes are.
- Standard deviation: The square root of the variance.
Slide 5:
- Rules for decision making under uncertainty:
- Maximax rule: Choose the option with the maximum possible payoff.
- Minimax rule: Choose the option with the minimum possible loss.
- Hurwicz rule: Choose the option with the highest expected value, adjusted for risk aversion.
- Savage rule: Choose the option that maximizes the minimum expected utility.
Slide 6:
- Expected utility: A measure of the satisfaction that a decision maker expects to receive from an outcome.
- Utility function: A mathematical function that assigns a number to each possible outcome, representing the decision maker's satisfaction with that outcome.
Slide 7:
- Why management may use the maximin rule:
- The maximin rule is a conservative rule that minimizes the maximum possible loss.
- This can be a good choice for decision makers who are risk-averse.
Conclusion:
Making decisions under risks and uncertainty is a complex process. There is no single best approach, and the best approach will vary depending on the specific situation. However, by understanding the different tools and techniques available, managers can make more informed decisions that are better aligned with their goals.
Sample Solution
Slide 1:
- Title: Making Decisions Under Risks and Uncertainty
- Subtitle: A Process for Managers
Slide 2:
- Decisions under certainty: Decisions made when all future outcomes are known with certainty.
- Decisions under risk: Decisions made when there is some uncertainty about future outcomes, but the probabilities of those outcomes are known.
- Decisions under uncertainty: Decisions made when there is complete uncertainty about future outcomes.