Unit 07 Intro to Uncertainty_1

Unit 07 Intro to Uncertainty_1 - Copyright 1999-2008 by R....

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Unformatted text preview: Copyright 1999-2008 by R. E. Wendell. 7-1 Unit 7 Introduction to Uncertainty "Making Predictions can be tricky -- especially when it's about the future" Neils Bohr (approximate quote) Copyright 1999-2008 by R. E. Wendell. 7-2 Relation to Ragsdale Example 1 and the discussion of decision criteria is similar to the Magnolia Inns problem on pp 725-735. Also, see pp 559-562. The concept of a risk profile is defined on page 753. This concept is also discussed on pp 578-581 in the context of simulation (there it is called an Output Cell Distribution instead of a Risk Profile). Example 2 is given as problem 5 in chapter 12. Ragsdale does not discuss Risk Management as an explicit topic. Copyright 1999-2008 by R. E. Wendell. 7-3 The REAL WORLD Isn't Predictable Copyright 1999-2008 by R. E. Wendell. 7-4 Ex 1: Premium Audio Premium Audio, a manufacturer of high-end audio equipment, is considering the launch of a new product. As its VP of Marketing, you have four alternatives each of whose profit depends on the economic conditions, which are outside of your control. (See Table.) Which alternative would you select? Recessionary Neutral Growth Low Ad $50,000 $80,000 $120,000 Medium Ad $20,000 $140,000 $200,000 High Ad-$40,000 $120,000 $220,000 Exit Market $75,000 $75,000 $75,000 Alternative State of the Economy Payoffs (Profits) Table Copyright 1999-2008 by R. E. Wendell. 7-5 What would an Optimist do? This is called the maximax approach What are the advantages of this approach? What are the drawbacks of this approach? Payoffs (Profits) Table Alternative State of the Economy Maximum Recessionary Neutral Growth Low Ad $50,000 $80,000 $120,000 $120,000 Medium Ad $20,000 $140,000 $200,000 $200,000 High Ad-$40,000 $120,000 $220,000 $220,000 Exit Market $75,000 $75,000 $75,000 $75,000 Copyright 1999-2008 by R. E. Wendell. 7-6 What would a Pessimist do? This is called the maximin approach What are the advantages of this approach? What are the drawbacks of this approach? Payoffs (Profits) Table Alternative State of the Economy Minimum Recessionary Neutral Growth Low Ad $50,000 $80,000 $120,000 $50,000 Medium Ad $20,000 $140,000 $200,000 $20,000 High Ad-$40,000 $120,000 $220,000-$40,000 Exit Market $75,000 $75,000 $75,000 $75,000 Copyright 1999-2008 by R. E. Wendell. 7-7 What would a Monday Morning Quarterback do? In the Premium Audio example, the payoffs were Suppose you choose Medium Advertising, and the State of the Economy turns out to be Growth. What would your regret be? Which alternative minimizes the maximum regret? This is called the minimax regret approach What are the advantages of this approach?...
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Unit 07 Intro to Uncertainty_1 - Copyright 1999-2008 by R....

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