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. | Chapter Twelve Decision Making under Uncertainty If Hell is paved with good intentions, it is largely because of the impossibility of foreseeing consequences. ~Aldous Huxley For Discussion Gearing Down for a Recession Selling yachts is a very cyclical industry. 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 4 Decision Trees An Oil Drilling Decision Good and Bad Decisions and Outcomes 5 Figure The Wildcatter’s Drilling Problem Decision Trees Features of the Expected-Value Criterion The Perils of International Business 7 Figure A complEX drilling decision 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 Figure . | Chapter Twelve Decision Making under Uncertainty If Hell is paved with good intentions, it is largely because of the impossibility of foreseeing consequences. ~Aldous Huxley For Discussion Gearing Down for a Recession Selling yachts is a very cyclical industry. 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 4 Decision Trees An Oil Drilling Decision Good and Bad Decisions and Outcomes 5 Figure The Wildcatter’s Drilling Problem Decision Trees Features of the Expected-Value Criterion The Perils of International Business 7 Figure A complEX drilling decision 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 Figure Simultaneous R&D Investments Figure Sequential R&D: Biochemical First Figure Sequential R&D: Biogenetic First Figure Summary of THE company’s R&D Options Risk Aversion A Coin Gamble The Demand for Insurance Risk Management at Microsoft Expected Utility A Risk-Averse Wildcatter A More Complicated Oil-Drilling Problem Why the Expected-Utility Method Works Figure The Wildcatter’s Drilling Problem Revisited Figure A COmplEX Drilling Prospect Risk Aversion (cont.) Expected Utility and Risk Aversion Figure The Wildcatter’s Utility Curve Figure Three Utility Functions Figure Ordering Yachts under .
