Professional Documents
Culture Documents
Advanced Performance Management (APM) : Risk & Uncertainty
Advanced Performance Management (APM) : Risk & Uncertainty
Risk &
Uncertainty
• Because a risk neutral decision maker neither seeks or avoids risk; he is happy
to accept the average outcome.
Expect
ed
Values
• Payoff (Profit)
tables
Solution: Payoffs table
Supply Salads
Demand 40 50 60 70
Salads Probability
Expected Values 80 90 80 30
Maximax, Maximin, Minimax Regret
• Maximax
• Best outcome of each scenario – best out of the best
• Maximin
• Worst outcome of each scenario – Best out of the worst
• Minimax Regret
• Maximum opportunity cost for each scenario – Minimum opportunity cost in all
Solution: Maximax- best out of the best
Supply Salads
Demand 40 50 60 70
Salads Probability
Demand 40 50 60 70
Salads Probability
Supply Salads
Demand 40 50 60 70
Salads Probability
• With maximax the decision maker chooses the outcome which is guaranteed to
maximise his profit and is used by decision makers who are risk seeking.
•
• With minimax regret the decision maker chooses the outcome which minimises
the maximum regret. In the process, he risks making a lower profit. It is often seen
as a technique for a ‘sore loser’ who does not want to make the wrong decision.
• Each of the above techniques can be used for oneoff or repeated decisions.
Risk Appetite
Risk Culture Features
Fatalist Assumes that they have no control over incidents
Hierarchists Follow a well structured approach for managing risk. Bureaucratic
Individualist Control their lives themselves, likes less formal structures and risk management
Low High