MBAM-101: Management Principles and Organization Behaviour – Unit 12
Objectives: structure a decision problem involving various alternatives and uncertainties in outcomes; apply marginal analysis for solving decision problems under uncertainty; analyse sequential problems using Decision Tree Approach; appreciate the use of Preference Theory in decision-making under uncertainty and analyse uncertain situations where probabilities of outcomes are not known.
Materials:
The relevant material is available here.
Questions:
- Suppose you have the option of investing either in Project A or in Project B. The outcomes of both the projects are uncertain. If you invest in Project A, there is a 99′ chance of making Rs. 20,000 profit, and a 1% chance of losing Rs. 1,00,000. If project B is choosen, there is a 50-50 chance of making a profit of Rs. 6,000 or Rs. 18,000. Which project will you choose and why?
- Draw the Preference Curve for a decision maker who believes in maximising EMV. Consider another decision maker who is risk averse. Will the Preference Curve of the latter always be below that of the former? Justify your answer.