Decision-making Under Risk

Abstract

When you have finished working through this chapter you should be able to

• Recognise that decisions may be affected by chance happenings

• Understand how probabilities may be assigned to different possible outcomes

• Understand the meaning of expected monetary value and how to calculate it

• Appreciate the difference between a state of nature and an option

• Construct a payoff matrix

• Make a decision by maximising the expected monetary value

• Understand the meaning of the expected value of perfect information and how to calculate it