Chapter 15

Risk Analysis: Walking Through the Fog

In This Chapter

arrow Playing with odds

arrow Making decisions with uncertain outcomes

arrow Developing decision-making criteria

arrow Determining the value of information

arrow Incorporating risk preferences

arrow Bidding to win

You may remember Mattel’s Magic 8 Ball. It’s a black globe that answers questions about the future. You hold it, ask a question, turn it over, and in a window the answer to your question appears. The answer I always seem to get is “Reply hazy, try again.” Such is the future — hazy. Or consider Yogi Berra’s contribution to planning, “If you don’t know where you’re going, you might wind up someplace else.”

To this point, I’ve examined decision-making in a certain or known environment. However, frequently the consequences or payoffs resulting from a decision or action are uncertain, depending upon factors outside your control. Therefore, it’s essential ...

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