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Risk Exam 3

Topic 7

Topic 7 - Decision Making Under Uncertainty *Step 4 in the Risk Management Process *Selection Among Risk Alternatives
Loss Matrix Indicates the possible $ values associated with each combination of: (a) risk mgmt. alternatives (b) future states of world
Two possible future states of the world... (a) loss (b) no loss
Possible Risk Management Options 1. Retention 2. Retention + Safety Measures 3. Full Insurance
Retention + Safety Measures -Loss Prevention -Decrease Frequency -Cost of using the Safety Measures
Income Tax Implications of "Expenses" Tax Deductible 1. Insurance Premiums 2. Cost of Safety Programs 3. Cost of Uninsured Losses
Firm: Revenue - $2,000 Expenses - $400 (Purchased Insurance) Tax Rate, Taxable Income, Tax Obligation, After-Tax Cost of Ins., After-Tax Cost of a Tax Deductible Expenditure (Look at notes)
Probability After tax expected losses for each option: (Look at notes)
If Decision Rule Choose Alternative That Minimizes Expected Cost
Each Decision or alternative actually has two types of "costs" 1. Monetary cost - expected cost 2. Non-monetary cost - "cost of uncertainty" - "worry value"
Worry value -Cost associted with decision making -Cost of anxiety/Uncertainty concerning a decision -Unique to a decision maker
Alternatives Offer a key decision maker a choice between retention w/ expected loss OR buy full insurance for an actuarially fair premium
Created by: 503413678



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