RMI 2302 Nyce Module 6 Exam Questions
With Complete Answers
Risk/Reward - ANSWER the level of risk should have a commensurate level of
reward
Individuals: - ANSWER Measured using expected utility
-How much reward is necessary to induce you to take risk?
-Similarly, how much are you willing to pay to avoid risk? -This is actually the
entire basis of insurance, people willing to pay to avoid risk
Organizations - ANSWER -Orgs. use expected value, not expected utility
-No natural risk aversion
-Opportunity cost or cost of capital
-Most organizations project future cash flows from investments/opportunities
-Discount those cash flows back to present value based on cost of capital
-Cost of capital is commensurate with riskiness of firm.
Government/Society - ANSWER -Measuring reward to society is difficult (reward
of national parks?)
-Many times government is the only entity able to take on risk, regardless of
reward
Bias - ANSWER An inclination of temperaments or outlook to present or hold a
partial perspective at the expense of (possibly equally valid) alternatives in
reference to objects, people, or groups.
-Subjective view/probability - different from objective
-Many sources
-Alter the decision making
-Problem when it ends up being significantly different from the model
Donald Rumsfeld - ANSWER There are the known knowns. These are the things
we know. There are the known unknowns. That is to say, there are things we
know we don't know. But there are also unknown unknowns. These are the
things we don't know we don't know.
Types of Bias - ANSWER Age biases, Cultural biases, Experience biases, Gender
biases, Media biases.
Cognitive biases - ANSWER tendencies to think in certain ways that can lead to
systematic deviations from a standard of rationality or good judgment
, Age biases - ANSWER people in certain age groups tend to interpret information
about risk differently
Cultural biases - ANSWER Interpreting and judging phenomena by standards
inherent to one's own culture.
-certain culture view of risk differ
Experience biases - ANSWER People who have experienced a low-
probability/high-consequence event tend to overestimate its likelihood,
(based on past events)
-people who have not experienced one, tend to underestimate
Gender biases - ANSWER biases based on gender?
Media biases - ANSWER risks that garner a lot of media attention (murder,
terrorism, kidnapping, etc...) are typically overestimated, while other risks (car
accidents, health risks) tend to be underestimated
-perceived bias of journalists and news producers within the mass media in the
selection of events and stories that are reported and how they are covered.
Incentives - ANSWER Things that motivate individuals to perform an action
-Now that we know how people make decisions, how do we get them to make
decisions that are advantageous to us?
-Incentives! Things that motivate individuals to perform an action.
-Incentives can be at the individual level, organizational level, or societal level
-Generally we refer to incentive structures
Financial Incentives - ANSWER Most incentives.
-Money saving incentives
Moral Incentives - ANSWER Do the right thing
-ethical incentives
Natural - ANSWER curiosity, fear, anger, pain, joy, pursuit of happiness
***HUMAN EMOTION***
Fear is an example of natural risk
Coercive - ANSWER -Applies negative reinforcement. If Eric does not keep a B,
he will lost his spot on the team. Losing his spot is the negative reinforcement.
Political Incentives - ANSWER short term vs. long term planning
With Complete Answers
Risk/Reward - ANSWER the level of risk should have a commensurate level of
reward
Individuals: - ANSWER Measured using expected utility
-How much reward is necessary to induce you to take risk?
-Similarly, how much are you willing to pay to avoid risk? -This is actually the
entire basis of insurance, people willing to pay to avoid risk
Organizations - ANSWER -Orgs. use expected value, not expected utility
-No natural risk aversion
-Opportunity cost or cost of capital
-Most organizations project future cash flows from investments/opportunities
-Discount those cash flows back to present value based on cost of capital
-Cost of capital is commensurate with riskiness of firm.
Government/Society - ANSWER -Measuring reward to society is difficult (reward
of national parks?)
-Many times government is the only entity able to take on risk, regardless of
reward
Bias - ANSWER An inclination of temperaments or outlook to present or hold a
partial perspective at the expense of (possibly equally valid) alternatives in
reference to objects, people, or groups.
-Subjective view/probability - different from objective
-Many sources
-Alter the decision making
-Problem when it ends up being significantly different from the model
Donald Rumsfeld - ANSWER There are the known knowns. These are the things
we know. There are the known unknowns. That is to say, there are things we
know we don't know. But there are also unknown unknowns. These are the
things we don't know we don't know.
Types of Bias - ANSWER Age biases, Cultural biases, Experience biases, Gender
biases, Media biases.
Cognitive biases - ANSWER tendencies to think in certain ways that can lead to
systematic deviations from a standard of rationality or good judgment
, Age biases - ANSWER people in certain age groups tend to interpret information
about risk differently
Cultural biases - ANSWER Interpreting and judging phenomena by standards
inherent to one's own culture.
-certain culture view of risk differ
Experience biases - ANSWER People who have experienced a low-
probability/high-consequence event tend to overestimate its likelihood,
(based on past events)
-people who have not experienced one, tend to underestimate
Gender biases - ANSWER biases based on gender?
Media biases - ANSWER risks that garner a lot of media attention (murder,
terrorism, kidnapping, etc...) are typically overestimated, while other risks (car
accidents, health risks) tend to be underestimated
-perceived bias of journalists and news producers within the mass media in the
selection of events and stories that are reported and how they are covered.
Incentives - ANSWER Things that motivate individuals to perform an action
-Now that we know how people make decisions, how do we get them to make
decisions that are advantageous to us?
-Incentives! Things that motivate individuals to perform an action.
-Incentives can be at the individual level, organizational level, or societal level
-Generally we refer to incentive structures
Financial Incentives - ANSWER Most incentives.
-Money saving incentives
Moral Incentives - ANSWER Do the right thing
-ethical incentives
Natural - ANSWER curiosity, fear, anger, pain, joy, pursuit of happiness
***HUMAN EMOTION***
Fear is an example of natural risk
Coercive - ANSWER -Applies negative reinforcement. If Eric does not keep a B,
he will lost his spot on the team. Losing his spot is the negative reinforcement.
Political Incentives - ANSWER short term vs. long term planning
