Risk_Perception_Case_Group_Qs_key_S08 - PAM 423 Questions...

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PAM 423 Questions for Case Assignment 2 Group Portion of Assignment Spring 2008 30 points total Questions and Answers 1. Economic theory directs managers to make risk management set the marginal benefit of risk management (reductions in the cost of risk) equal to the marginal cost of risk management. When risk management is costly, this perspective implies that it is optimal to accept some risk and that “zero risk” is not an appropriate risk management objective. (i) 6 points Discuss the difficulties of implementing the MC=MB rule in the context of manned space flight and potential chemical disasters. The difficulties include (i) the potential accidents involve loss of life which is difficult to value; (ii) the probability of an accident is difficult to estimate; (iii) the cost of an accident is difficult to estimate. This makes the total expected costs of accidents difficult to estimate, and this makes it difficult to estimate the marginal benefit of additional risk management investments. (ii) 4 points Does it appear that Chemco and NASA are trying to make decisions according to this rule? Defend your answer. My opinion is that they both are trying to do this. Groups’ opinions could vary. (iii) 2 points Do you agree that the MC=MB rule should apply in these risk contexts? Explain. If you cannot come to agreement, tell me what proportion of you agree/disagree, and describe the main arguments of each subgroup. In order to minimize the total cost of risk to a firm, or to minimize the total cost of risk to
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This note was uploaded on 05/19/2008 for the course PAM 4230 taught by Professor Tennyson during the Spring '07 term at Cornell University (Engineering School).

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Risk_Perception_Case_Group_Qs_key_S08 - PAM 423 Questions...

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