MGE 302 Lecture Notes - Lecture 15: Decision Rule, Standard Deviation, Relative Risk
13 Dec 2018
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Document Summary
Essential concepts: conditions of risk occur when a manager must make a decision for which the outcome is not known with certainty. Under conditions of risk, the manager can make a list of all possible outcomes and assign probabilities to the various outcomes. Expected value of x n p x i i i. 1 where xi is the i t h outcome of a decision, pi is the probability of the i t h outcome, and n is the total number of possible outcomes in the probability distribution. The higher (lower) the variance, the greater (lower) the risk associated with a probability distribution: the standard deviation is the square root of the variance: s = x. E( x ) u = (cid:9: while no single decision rule guarantees that profits will actually be maximized, there are a number of decision rules that managers can use to help them make decisions under risk.
