Chapter 12 - Decision making under uncertainty. In this chapter, we focus on decisions involving risks situations in which the consequences of any action the decision maker might take are uncertain because unforeseeable events may occur that will affect his or her final situation.
Managerial Economics, 8e William F. Samuelson ● Stephen G. Marks Chapter Twelve Decision Making under Uncertainty Copyright © 2015 John Wiley & Sons, Inc. All rights reserved If Hell is paved with good intentions, it is largely because of the impossibility of foreseeing consequences ~Aldous Huxley Copyright © 2015 John Wiley & Sons, Inc. All rights reserved For Discussion Gearing Down for a Recession Selling yachts is a very cyclical industry Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Uncertainty, Probability, and Expected Value Uncertainty (or risk) is present when there is more than one possible outcome for a decision The probability of an outcome is the odds or chance that the outcome will occur Expected Value Copyright © 2015 John Wiley & Sons, Inc. All rights reserved 1.3 Decision Trees An Oil Drilling Decision Good and Bad Decisions and Outcomes Copyright © 2015 John Wiley & Sons, Inc. All rights reserved 1.3 Figure 12.1 The Wildcatter’s Drilling Problem Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Decision Trees Features of the ExpectedValue Criterion The Perils of International Business Copyright © 2015 John Wiley & Sons, Inc. All rights reserved 1.3 Figure 12.2 A complEX drilling decision Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Sequential Decisions An R&D Decision Revisited Business Behavior—Risky Decisions Seeing too few possibilities Relying on verbal expressions of probability Holding optimistic beliefs The BP Oil Spill Disaster Revisited Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12.3 Simultaneous R&D Investments Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12.4 Sequential R&D: Biochemical First Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12.5 Sequential R&D: Biogenetic First Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12.6 Summary of THE company’s R&D Options Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Risk Aversion A Coin Gamble The Demand for Insurance Risk Management at Microsoft Expected Utility A RiskAverse Wildcatter A More Complicated OilDrilling Problem Why the ExpectedUtility Method Works Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12.7 The Wildcatter’s Drilling Problem Revisited Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12.8 A COmplEX Drilling Prospect Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Risk Aversion (cont.) Expected Utility and Risk Aversion Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12.9 The Wildcatter’s Utility Curve Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12.10 Three Utility Functions Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12.11 Ordering Yachts under uncertainty Copyright © 2015 John Wiley & Sons, Inc. All rights reserved ... Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12. 3 Simultaneous R&D Investments Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12. 4 Sequential R&D: Biochemical First Copyright © 2015 John Wiley & Sons, Inc. All rights reserved... Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12. 5 Sequential R&D: Biogenetic First Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12. 6 Summary of THE company’s R&D Options... Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12. 7 The Wildcatter’s Drilling Problem Revisited Copyright © 2015 John Wiley & Sons, Inc. All rights reserved Figure 12. 8 A COmplEX Drilling Prospect Copyright © 2015 John Wiley & Sons, Inc. All rights reserved