MANG6134W1 RISK TAKING AND DECISION MAKING

SECTION A

You must answer at least ONE question from this section.

1. The dominant company in the sporting goods industry, Nezuko Corporation, has experienced a decline in its revenue due to an ageing population in recent years. As the newly appointed CEO of Nezuko Corp., Rebekah is contemplating improving Nezuko’s revenue by exploring new opportunities from senior citizens. She decides to use decision analysis to identify the most effective solution to achieve this goal.

(a) Using material from all areas studied in this module, give specific examples of what Rebekah might need to do at each stage of this analysis. (700 words maximum) (40 marks)

(b) Explain in detail the advantages of the decision analysis approach. (500 words maximum) (30 marks)

(c) Explain the potential problems of this approach. (400 words maximum) (30 marks)

2. (a) People often over-/under-estimate event probabilities. Explain, with the help of examples, the manner in which people over-/under-estimate probabilities because of the (i) availability, (ii) representativeness and (iii) anchoring and adjustment heuristics. (900 words maximum) (60 marks)

(b) They also tend to over-/under-weight probabilities during the decision-making process. Explain, with the help of a diagram and numerical examples, the manner in which people over-/under-weight probabilities as described by Prospect Theory. (500 words maximum) (40 marks)

3. (a) Outline the relative strengths and weaknesses of using (i) individuals and (ii) selected groups of experts for making subjective probability judgements. (800 words maximum) (60 marks)

(b) Explain why quasi-behavioural methods may be better than mathematical aggregation methods? (200 words maximum) (10 marks)

(c) Describe the Nominal Group technique and explain how it improves upon the Delphi method. (300 words maximum) (30 marks)

SECTION B

You must answer at least ONE question from this section.

4. As a result of the Covid pandemic, the management of FeiFei plc (F) are discussing with the executive workers union Emsa (E), the introduction of more flexible working practices to help increase profits. In return for accepting the new working practices, E are negotiating an increase in salaries. In these negotiations, E are attempting to maximise salaries and F are attempting to maximise their profits.

(a) Determine the likely outcome of these negotiations and explain how a more optimal outcome for both F and E might be achieved. (300 words maximum) (35 marks) The management of FeiFei plc (F) is also attempting to renegotiate a deal for the cost of its raw materials from Hippo plc (H).

(b) Discuss why H3, F4 might appear to be a ‘solution’ to these negotiations and explain why it is unlikely to be achieved in practice. (250 words maximum) (25 marks)

(c) Determine the optimal strategy for both H and F in these negotiations and the amount which F can expect to pay for the raw materials. Explain the method adopted at each stage of these calculations. (300 words maximum) (40 marks)

5. The cost-of-living increases brought about by the pandemic, including increased energy costs, has forced Emma Wang, the managing director of PinkiePie plc, to identify new marketing strategies she might employ over the coming year in order to maximise PinkiePie’s sales.

(a) If Emma Wang employs the coefficient of optimism criterion to select an optimal strategy, determine how optimistic she would need to be in order to choose strategy C and explain the methodology employed. (200 words maximum) (15 marks)

(b) Determine which strategy Emma Wang would employ if she used the regret criterion and explain the methodology employed? (150 words maximum) (15 marks)

(c) Outline the relative strengths and weaknesses of the maximax and the insufficient reason criteria. (200 words maximum) (20 marks)

(d) Pinkie Pie’s economist informs Emma Wang that inflation will be either ‘high’ or ‘low’ in the coming year (i.e., he believes that inflation will not be ‘medium’). Following discussions, they agree that the probability of inflation being ‘high’ is 0.8 and ‘low’ is 0.2.

In the light of this additional information determine which strategy Emma Wang would select if she employed the ‘EMV’, ‘Variance’, and ‘Risk-adjusted statistic’ techniques. You are also expected to discuss the relative merits of these approaches and the value of sensitivity analysis when employing these techniques. (300 words maximum) (50 marks)

6. A mathematician, David McDon, has developed a range of mathematical algorithms for trading on financial markets. He is trying to decide which of two marketing strategies to employ to promote the company’s algorithms, ‘Adventurous’ (A) or ‘Factual’ (F). Based on extensive market research, it is clear to him that whichever of these strategies he employs, there will be a range of subsequent strategies from which to choose and that many of these have uncertain outcomes. David McDon decides to construct a decision tree of the potential strategies, chance events and likely outcomes, measured in terms of potential increases in revenue (£M).

(a) Calculate the expected increase in revenue if David McDon decides to adopt an Adventurous (A) marketing strategy. (20 marks) David McDon has not been able to estimate all the probabilities associated with his decision (i.e., those labelled x and y in the decision tree diagram).

(b) Determine the minimum value that probability y must be in order for David McDon to adopt strategy Factual (F) followed by strategy G, and outline any assumptions you make in determining this value. (150 words maximum) (20 marks)

(c) Explain to David McDon the benefits of using a decision tree to help inform his choice. (250 words maximum) (20 marks)

(d) Describe a risk/return diagram and explain its value when making decisions such as that facing David McDon [No calculation required]. (300 words maximum) (25 marks)

(e) Explain to David McDon the value of using utility values rather than monetary amounts for the outcomes which might be achieved from the various strategies associated with his decision [No calculation required]. (200 words maximum) (15 marks)