Lecture Managerial economics (8e): Chapter 12 - Samuelson, Marks

Chapter 12 - Decision making under uncertainty. In this chapter, we focus on decisions involving risks situations in which the consequences of any action the decision maker might take are uncertain because unforeseeable events may occur that will affect his or her final situation.

Managerial Economics, 8e William F. Samuelson   Stephen G. Marks ●

Chapter Twelve

Decision Making under 

Uncertainty

If Hell is paved with good 

intentions, it is largely because 

of the impossibility of  foreseeing consequences.

~Aldous Huxley

Gearing Down for a Recession

Selling yachts is a very cyclical industry.

1.3

Uncertainty, Probability, and Expected 

Value

Uncertainty (or risk) is present when there is more than 

one possible outcome for a decision.

The  probability of an outcome is the odds or chance that 

the outcome will occur.

Expected Value

Decision Trees

An Oil Drilling Decision

Good and Bad Decisions and Outcomes

Figure 12.1

The Wildcatter’s 

Drilling Problem

Decision Trees

Features of the Expected­Value Criterion

The Perils of International Business

Figure 12.2

A complEX 

drilling decision

An R&D Decision Revisited

Business Behavior—Risky Decisions

Seeing too few possibilities

Relying on verbal expressions of probability Holding optimistic beliefs

The BP Oil Spill Disaster Revisited

Figure 12.3

Simultaneous R&D Investments

Sequential R&D: 

Biochemical First

Figure 12.5

Sequential R&D: 

Biogenetic First

Summary of THE

company’s R&D Options

Risk Aversion

A Coin Gamble

The Demand for Insurance

Risk Management at Microsoft

Expected Utility

A Risk­Averse Wildcatter

A More Complicated Oil­Drilling Problem Why the Expected­Utility Method Works

The Wildcatter’s Drilling Problem  Revisited

Figure 12.8

A COmplEX Drilling Prospect

Expected Utility and Risk Aversion

Figure 12.9

The Wildcatter’s Utility Curve

Three Utility Functions

Figure 12.11

Ordering Yachts under uncertainty