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Risk & Uncertainty TA - Coggle Diagram
Risk & Uncertainty TA
Forms of risks
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Industry sectors
Eg. Banking, car manufacturing, construction
General economic
Eg. Interest rate/currency fluctuations, looming risk of recession
Risk VS Uncertainty
Risk
The probabilities of the possible outcomes are known
(such as when tossing a coin or throwing a dice)
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Probability
The likelihood or chance that a certain event will occur, with potential values ranging from 0 to 1.
The total of all the probabilities from all the possible outcomes must equal 1
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Decision making criteria
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Minimax regret
Minimise the regret from making the wrong decision and is based upon first identifying the optimal decision for each of the weather outcomes. The decision is then made on the basis of the lowest regret.
Decision trees
Symbols
Squares (□), which are used to represent ‘decisions’
Circles (○), which are used to represent ‘outcomes.’
A diagrammatic representation of a problem and on it show all possible courses of action that can take in a particular situation and all possible outcomes for each possible course of action
Useful where there are a series of decisions to be made and/or several outcomes arising at each stage of the decision-making process
Constructing the tree
Eg. 
Evaluating the decision
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- Label all of the decision and outcome points
- At each outcome point, calculate the expected value of the cash flows by applying the probabilities to the cash flows.
3 The recommendation is made to management, based on the option that gives the highest expected value.
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