Some decision makers prefer decisions with low risk, but this depends on how risk is measured. As we mentioned in this section, variance (see the definition in problem 1) is one measure of risk, but it includes both upside and downside risk. That is, an outcome with a large positive payoff contributes to variance, but this type of “risk” is good. Consider a decision with some possible payoffs and some possible costs, with given probabilities. How might you develop a measure of downside risk for such a decision? With your downside measure of risk, which decision in Figure 9.1 do you prefer, decision 1 or decision 2? (There is no single correct answer.)

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Practical Management Science

6th Edition
WINSTON + 1 other
Publisher: Cengage,
ISBN: 9781337406659
BuyFind

Practical Management Science

6th Edition
WINSTON + 1 other
Publisher: Cengage,
ISBN: 9781337406659

Solutions

Chapter
Section
Chapter 9.2, Problem 3P
Textbook Problem

Some decision makers prefer decisions with low risk, but this depends on how risk is measured. As we mentioned in this section, variance (see the definition in problem 1) is one measure of risk, but it includes both upside and downside risk. That is, an outcome with a large positive payoff contributes to variance, but this type of “risk” is good. Consider a decision with some possible payoffs and some possible costs, with given probabilities. How might you develop a measure of downside risk for such a decision? With your downside measure of risk, which decision in Figure 9.1 do you prefer, decision 1 or decision 2? (There is no single correct answer.)

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Chapter 9 Solutions

Practical Management Science
Ch. 9.5 - In Example 9.2, Acmes probability of technological...Ch. 9.5 - In Example 9.2, the fixed costs are split 4...Ch. 9.5 - In Example 9.2, use a two-way PrecisionTree...Ch. 9.5 - Starting with the finished version of the file for...Ch. 9.5 - Starting with the finished version of the file for...Ch. 9.5 - Suppose you are tested to see if you have a rare...Ch. 9.5 - In Example 9.2, a technological failure implies...Ch. 9.5 - The model in Example 9.3 has only two market...Ch. 9.6 - Using the finished version of the file for Example...Ch. 9.6 - You saw in Example 9.4 how Acme prefers to abandon...Ch. 9.6 - Starting with the finished version of Example 9.2,...Ch. 9 - The SweetTooth Candy Company knows it will need 10...Ch. 9 - Carlisle Tire and Rubber, Inc., is considering...Ch. 9 - A local energy provider offers a landowner 180,000...Ch. 9 - An investor with 10,000 available to invest has...Ch. 9 - Two construction companies are bidding against one...Ch. 9 - You have sued your employer for damages suffered...Ch. 9 - Consider a population of 3000 people, 1400 of whom...Ch. 9 - Yearly automobile inspections are required for...Ch. 9 - Ford is going to produce a new vehicle, the...Ch. 9 - A nuclear power company is deciding whether to...Ch. 9 - The Indiana University basketball team trails by...Ch. 9 - Your company needs to make an important decision...Ch. 9 - If your company makes a particular decision in the...Ch. 9 - In the previous question, suppose you have the...Ch. 9 - In a classic oil-drilling example, you are trying...Ch. 9 - Your company has signed a contract with a good...Ch. 9 - You must make one of two decisions, each with...Ch. 9 - A potentially huge hurricane is forming in the...Ch. 9 - It seems obvious that if you can purchase...Ch. 9 - Insurance companies wouldnt exist unless customers...Ch. 9 - You often hear about the trade-off between risk...Ch. 9 - Can you ever use the material in this chapter to...

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