9781118041581

Selling yachts is a very cyclical industry. In a booming economy, large increases in personal dis-

posable income greatly expand the demand for this high-priced luxury item. In the midst of a reces-

sion, sales of yachts sink and a sizable percentage of yacht dealers go out of business. You have

owned a yacht dealership for the last two years and have made handsome profits during the good

times. Currently you are in the process of deciding on the number of yachts to order from the man-

ufacturer for the coming season. If the economy continues to grow as in the past, your order will

be roughly the same as in the previous year. However, a number of economic forecasters are pre-

dicting a significant chance—40 percent—of a recession in the next six months. If a recession

occurs, you can expect to sell no more than half the number of yachts sold in the past. Should you

order for a rising economy or scale back for a recession? A wrong decision means large losses (in

an unexpected recession) or forgone profits (in an unexpected boom).

In this chapter, we focus on decisions involving risks—situations in which the

consequences of any action the decision maker might take are uncertain

because unforeseeable events may occur that will affect his or her final situa-

tion. To analyze this type of problem, the decision maker should begin by

1. Listing the available alternatives, not only for direct action but also for
   gathering information on which to base later action.

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CHAPTER 12

Decision Making

under Uncertainty

If Hell is paved with good intentions, it is largely because of the impossibility

of foreseeing consequences.

ALDOUSHUXLEY

Gearing Down

for a Recession

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