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Decision making under conditions of risk and uncertainty

5 important questions on Decision making under conditions of risk and uncertainty

To what kind of situation is risk applied?

Ris is applied to a situation where there are several possible outcomes and there is relevant past experience to enable statistical evidence to be produced for predicting the possible outcomes.

When does uncertainty exists?

Uncertainty exists where there are several possible outcomes, but there is little previous statistical evidence to enable the possible outcomes to be predicted.

How is the expected value/payoff calculated?

The expected value/payoff is calculated by weighting each of the profit levels (i.e. possible outcomes) by its associated probability and taking the sum of those.

What is the conventional measure of the dispersion of a probability distribution?

The standard deviation. The relative amount of dispersion can be expressed by the coefficient of variation, which is the standard deviation divided by the expected value.

How can the value of additional information be ascertained?

The value of additional information is ascertained by deducting the expected value of possible outcomes without a market survey from the expected value with the survey. As long as the cost of obtaining the information is less than the expected value of perfect information, a market consultant should be hired.

The question on the page originate from the summary of the following study material:

Samenvatting FIDM

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