RMI 2302 Exam 1 Notes Dr Nyce FSU Module 1 Categories of Risk Risk Uncertainty regarding loss Danger does not mean risk Risk Measurement o Frequency Likelihood o Severity Impact o Expected Value loss o Risk Profile o Pure vs Speculative o Static vs Dynamic o Fundamental vs Particular o Core vs Secondary Sources of Risk o Personal o Property o Liability o Financial Exposure person facing risk Peril immediate cause of loss Hazard condition affecting the frequency severity of loss o Physical hazard property conditions o Moral hazard change in behavior o Morale hazard indifference o Societal hazard legal cultural Loss frequency Number of losses Risk prevention methods are best applied to high Categories of risk retention 1 Planned Unplanned 2 Funded Unfunded frequency losses 3 car automobile accident particular risk Module 2 Last step in risk management process Review and Evaluate Leaves door unlocked b c you won t have to pay for loss moral hazard Combination of questionnaires checklists and program guides identifies all risks faced by an organization Example of liability risk responsible for harm of someone Example of physical hazard leaving oily rags around workplace Innovation Risk How to Make Smarter Decisions 1 The Dow Jones Industrial Average is NOT measured by the Black Scholes formula 2 Models that apply to real life situations often exist semiconsciously 3 The model s utility depends not just on the model itself but on who is using it and why they re using it 4 benefits risks in large are determined by the infrastructure into which the innovation is introduced 5 Changing infrastructure to accommodate every innovation that comes along is infeasible human cognition A Scientific View of Risk 6 Mathematical modeling is more precise than 1 the main theme of this article is that there are both monetary and non monetary costs to risk reduction 2 Added a time period to the definition of risk Incorrect model internal logic underlying assumptions are wrong should be discontinued Module 3 Module 4 Incomplete model contains no fundamentally wrong assumptions but may not be complete can be added to The Maximax or Minimin Principle of decision making stipulates that a decision maker s view is extreme optimism The Maximum Likelihood Principle ignores other available information Decision Theory steps Decisions under risk the decision maker chooses to Pessimistic conservative decision makers use the Rollback technique working backwards from right to Decision theory consider outcomes and probabilities of their occurrence Maximin minimax principle left through a decision tree is used to determine optimal strategies where a decision maker is faced with several alternatives and an uncertain or risky pattern of future events Pay offs are conditional values Utility Theory claims that decisions are made to maximize expected utility rather than expected monetary value Risk averse play it safe Thinking Like an Economist 1 Normative questions ask about what policies or institutional arrangements lead to the best outcomes Positive questions ask what the consequences of specific policies are 2 Common pitfalls of decision making 1 Failing to ignore sunk costs 2 Measuring costs and benefits as proportions 3 Failing to understand the average marginal distinction Opportunity cost value of all that must be sacrificed in order to benefit Square root utility function The decision maker classifications for individuals under utility theory are risk averse risk seeking and risk neutral Module 5 in the U S 72 Sole proprietorship is the most common type of ownership Payroll taxes taxes based on wages and salaries Monopolies of an industry control the supply Positive externalities can be corrected by a Subsidizing consumers b Subsidizing suppliers c Allowing the government to provide goods Government purchases are exhaustive while transfer payments are non exhaustive Quasi public goods are provided by the government that fit the definition of a public good but can be delivered in such a way that exclusion is possible Corporations limited liability and ease of expansion Methods of income disposal a Personal savings b Personal taxes c Personal consumption expenditures Balancing Liberty and the Pursuit of Well Being Both freedom and happiness are good but an imbalance can lead to poor decisions
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