14_Overheads - TODAY: We begin to examine the...

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ACC 333 (Farrell), Fall 2011, Class 14 1 ACC 333 (Far el ) Fal 2011, Class 14 1 TODAY: We begin to examine the decision- facilitating role of accounting Accounting tools, and tools that use accounting information as inputs, that can help managers make better decisions We start by looking at some “habits” (called heuristics and biases) we have when making decisions ACC 333 (Far el ) Fal 2011, Class 14 2 Objectives for today Risk and uncertainty in managerial decisions – Definitions of risk and uncertainty Heuristics and biases that can influence decision-making under uncertainty – Examples – Takeaway Steps we can take to make “good” decisions ACC 333 (Far el ) Fal 2011, Class 14 3 Definitions of risk and uncertainty Risk: – possibility of loss or peril – situations in which the possible future outcomes from a choice have known probabilities Uncertainty: – lack of sureness – situations in which the possible future outcomes (and perhaps the possible outcomes themselves) from a choice have probabilities that are inexact or lacking entirely
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ACC 333 (Farrell), Fall 2011, Class 14 2 ACC 333 (Far el ) Fal 2011, Class 14 4 Definitions of risk and uncertainty (continued) Types of risk and uncertainty Pure Risk: No possibility of gain, only the possibility of loss from an event • e.g. loss from a flood Speculative Risk: The possibility of profit or loss from an event • e.g., investments Business Risk: The chance of something happening in the future that will have an impact on business objectives • a type of speculative risk ACC 333 (Far el ) Fal 2011, Class 14 5 Definitions of risk and uncertainty (continued) Some types of business risk 1) Competition (changes in markets) 2) Price (prices customers pay; what we pay for inputs) 3) Credit (obtaining or extending) 4) Interest rate (fluctuations) 5) Foreign exchange (currency fluctuations) 6) Political (regulatory requirements or laws) 7) Environmental (acts of nature) 8) Operational (everything else) ACC 333 (Far el ) Fal 2011, Class 14 6 Remember that survey? Let’s use your responses to illustrate: Heuristics and biases that can influence decision-making under uncertainty
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ACC 333 (Farrell), Fall 2011, Class 14 3 ACC 333 (Far el ) Fal 2011, Class 14 7 Heuristics and biases: Framing effects, prospect theory Survey question Imagine that the United States is preparing for the outbreak of a rare disease which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the scientific estimates of the consequences of the programs are as follows: ACC 333 (Far el ) Fal 2011, Class 14 8 Heuristics and biases: Framing effects, prospect theory (continued) Notice that: Survey A framed in terms of lives saved, B lives lost. Option 1 is certain choice, Option 2 is risky choice.
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This note was uploaded on 03/19/2012 for the course ACCACC 333 taught by Professor Anne during the Fall '11 term at Miami University.

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14_Overheads - TODAY: We begin to examine the...

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