Decisions that the company has made under certainty using primary and secondary data.
Your chief executive officer (CEO) has asked you to present the company’s process on making decisions under risks and uncertainty at the annual shareholders' meeting.
Help with this Unit 5 project is in Chapters 15 of Managerial Economics: Foundations of Business Analysis and Strategy.
The presentation on the process on making decisions under risks and uncertainty will cover the following points:
Two slides: Explain decisions that the company has made under certainty using primary and secondary data.
Two slides: Explain any risky and uncertain decisions that the company plans to address in the next fiscal year.
Three slides: Discuss how risks can be measured.
Three slides: Explain the rules that can help managers make decisions under uncertainty.
Three slides: Explain the expected utility.
Two slides: Discuss why management may use the maximin rule.
Deliverable Requirements: Your presentation on the process on making decisions under risks and uncertainty is 15 slides in length (excluding title and reference slides). It would help if you used the Notes sections with academic citations supporting your decisions and analysis. A variety of academic sources is encouraged. Be sure to cite sources using the APA style, including references and in-text citations.
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.
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.