Managerial Economics and Strategy, 2/e

Summary

1. Assessing Risk. A probability measures the likelihood that a particular state of nature occurs. People may use historical frequencies, if available, to calculate probabilities. Lacking detailed information, people may form subjective estimates of a probability on the basis of available information. The expected value is the probability-weighted average of the values in each state of nature. One widely used measure of risk is the variance (or the standard deviation, which is the square root of the variance). The variance is the probability-weighted average of the squared difference between the value in each state of nature and the expected value.

2. Attitudes Toward Risk. Whether people choose a risky option over a nonrisky one depends on ...