9781118041581

Summary 531

SUMMARY

Decision-Making Principles

1. In choices among risky prospects, sound decision making means assessing
   the foreseeable good and bad outcomes and their respective chances.
   Thus, decisions must be judged according to the information available at
   the time the choice is made, not with the benefit of 20–20 hindsight.


2. When a series of related decisions are to be made, an optimal initial
   choice depends on foreseeing and making optimal choices for the
   decisions that follow.


3. To make sound decisions, the manager must also assess his or her own
   (or the company’s) attitude toward risk. A risk-averse decision maker
   assesses a (certainty equivalent) value for a risky prospect that is smaller
   than the prospect’s expected value.

Nuts and Bolts

1. The decision tree is the basic tool for making decisions under uncertainty.
   The tree must include branches for (a) all possible actions of the decision
   maker and (b) all chance events that can affect outcomes. Each chance
   branch should be assigned a probability. In decisions involving profits and
   losses, each branch tip should be assigned a monetary value.

FIGURE 12.11

Ordering Yachts under

Uncertainty

The dealer’s better

course of action is

to order 50 yachts.

175

.6

.4

$225

$100

150

.6

.4

$350

–$150

Growing economy

Recession

Growing economy

Recession

Order 100 yachts

Order 50 yachts

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