Module 6 Learning Objectives Contrast risk reward trade off at the individual organizational societal levels Differentiate bias type Classify incentives Describe the effect that policies have on expected value calculations Risk Reward most important part of class Business who do this effectively are more successful Individuals make decisions on expected utility not expected value Reward necessary for risk how much will you pay to avoid risk this is expected utility Uses square root function 1 5 9 50 50 chance or receiving always choose 5 dollar option because the expected utility is higher Organizations use expected value which uses opportunity cost This is business profit Trading economics government bond returns return on a bond reward vs risk Reward you may get a return on the bond Risk you may not get your back Cost of capital correlates with the return risk vs reward how much ie Fire Suppression system for a company this example used a PV function in microsoft excel versus depreciation it balanced the trade off with the required rate of return and future cash flows Basically as a business if it makes sense to make a decision based on profit If the investment makes more sense financially than replacing whatever product would get destroyed in the case of a fire then the suppression system is a sound investment as an organization Capital Asset Pricing Model another way of measuring riskiness of firm relative to the market uses systemic risk nondiversifiable risk ie portfolio risk risk volatility correlates with efficiency lower risk w the same gains is more efficient than a risky investment with the same gains Government Society measuring the rewards of an investment to society is difficult For instance what is the value of a national park to society There s no real way to put a value on this in these cases government usually takes on all of the risk with none of the rewards ie flood risk Bias subjective view probability different from objective problem inconsistent with model being used Age bias risk reward tradeoff is different with age groups older people tend to be more conservative while younger people take on more risks linked towards experience Cultural bias cultures risk differently ie natural disasters that have been lived though This bias has a strong link to experience but is usually an idea shared by a culture Media mass shooting being disproportionately covered on the news or terrorism vs car accident deaths These low probability events are overestimated by the media Incentives motivation for individuals to perform an action Financial most frequent money Moral do the right thing Natural curiosity fear anger pain joy pursuit of happieness Coercive negative reinforcement Personal vs Social Personal incentives may be different and usually are than societal incentives Study of economics is essentially the study of incentivizing things Law of Unintended Consequences something you never thought about happening as a company ie cloning biomedical engineering ritalin adderall prominent use as a study drug Political Incentives short vs long term benefit of longer term usually not met for short term political gain has a high discount rate Module 7 Learning Objectives property Liability Health Life Financial Categorize individual risks Analyze risks along the elements of a loss exposure Describe the risks and rewards associated with smart pills Describe the problems in the US healthcare system outlined by the smart pills reading Explain the ethical considerations involved with cognitive enhancements Lots of ways to categorize risks We categorize them so we can use risk management techniques because some risks are not mutually exclusive or in other words some risks appear in multiple categories ie property and liability Property Loss Exposures any condition or situation that presents a possibility of loss regardless of whether that loss actually occurs Three elements to loss exposure asset exposed to the loss Real Property such as land buildings crops etc Personal Property such as your stuff furniture jewelry art autos watercraft etc laptop computer etc etc cause of the loss Fire theft hurricane accidents lost etc etc financial consequences of experiencing that loss Reduction in property value ie house burnt down property is now worth less may have some value but house value is gone and other increased expenses Increased expenses Lost income such as having to stay in a hotel while the home is rebuilt etc rental apartment landlord won t have income while building is being fixed Risk management techniques theft security systems driving more carefully INSURANCE No real way other than insurance to deal with the category of property loss Liability Asset exposed to loss Money other financial assets General Damages pain and suffering generally intangible Special you miss work after an accident lost wages medical bills damage to your vehicle etc Cause of Loss Punitive damages generally tangible ensure you don t do something again Claim lawsuit civil law law amongst individuals No contract involved as long as no ones committing criminal law it is civil law laws of society ie OJ Simpson Contract Law fail to adhere to a contractual obligation Statutory Law fail to do something according to a statute Tort no relationship with one another ie driving cars in opposite directions no law telling us what to do Not a criminal act negligence i was supposed to do something but I didn t Or driving over the speed limit Financial Consequences defense costs Specific Types Of Liability Property Owners need to ensure that their property is safe for visitors ie if you have an attractive nuisance pool trampoline basketball hoop You need to ensure unsupervised access is not possible If a child drowns you are responsible You can t set traps for intruders You have to warn guests of dangerous conditions Automobiles if you are in an accident and you are at fault Employer employee As an employer you can be held liable for your employees violations Vicarious Liability Sexual harassment injuries work conditions Parents and children Parents can be held liable for children s actions ie you can t tell a 13 year old to beat someone up Animals if your animal bites someone it s your fault ie keeping a cougar in your house Besides insurance for liabilities you can NOT prevent these things other than being careful To manage most liability exposures you must simply be careful Life Premature Death premature death has many
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