B6: Decision Making Techniques | Dealing With Risk and Uncertainty in Decision Making (ACCA F5)

B6- Dealing With Risk and Uncertainty in Decision Making

Dealing with risk and uncertainty in decision making identifies research techniques that can be used to reduce uncertainty, explains the use of simulation, expected values and sensitivity, how to apply expected values and sensitivity to decision-making problems, how to apply maximax, maximin and minimax in decision making; how to draw a decision tree and how to calculate the value of perfect and imperfect information.

Dealing With Risk and Uncertainty in Decision Making

Risk “involves situations or events which may or may not occur, but whose probability of occurrence can be estimated statistically.

Uncertain events are “events where the outcome cannot be estimated with a statistical probability.”

a) Suggest research techniques to reduce uncertainty e.g. Focus groups, market research.

Market research is used to “gather, analyse and report data about markets to investigate, describe, measure, understand or explain a situation or problem facing a company or organization.”

There are several research techniques which can be used to reduce uncertainty. Some of them are focus groups, brainstorming, expert judgement, estimation, meetings and historical data.

b) Explain the use of simulation, expected values and sensitivity.

Simulation models are used to “deal with decision problems when there are a large number of uncertain variables.”

Expected values “indicate what an outcome is likely to be in the long term, if the decision can be repeated many times over.”

Sensitivity analysis is used to analyse the uncertainty in a situation or decision.

c) Apply expected values and sensitivity to decision-making problems.

Expected values and sensitivity are also critical when dealing with risk and uncertainty. For examples which show how to apply expected values and sensitivity to decision-making problems, please refer to BPP’s ACCA F5 Performance Management Study Text.

d) Apply the techniques of maximax, maximin, and minimax regret to decision-making  problems including the production of profit tables.

The maximin decision rule means choosing the option that maximizes the minimum profit.

The maximax decision rule means choosing the option that provides the maximum possible profit.

The minimax decision rule aims to minimize regret from making the wrong decision.

e) Draw a decision tree and use it to solve a multi-stage decision problem

Decision trees are diagrams which illustrate the possible outcomes of a decision. For each decision, the probabilities of occurrence are also calculated.

f) Calculate the value of perfect and imperfect information.

The value of imperfect information is the “difference between the expected value of profit with imperfect information and the expected value of profit with the information.”

For examples which show how to calculate the value of perfect and imperfect information, please refer to BPP’s ACCA F5 Performance Management Study Text.

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