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Risk Exam 3
Topic 7
| Question | Answer |
|---|---|
| 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 |
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