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Decision Making for Business Leaders

This document discusses different formulations for decision makers and objectives. It covers: 1) Single goal/single decision maker formulations that either do not incorporate risk and utility, using metrics like internal rate of return and present value, or do incorporate risk and utility using utility functions. 2) Utility functions can classify decision makers as risk averse, risk neutral, or risk loving based on the utility curve. 3) Multiple goal formulations with a single decision maker aim to achieve more than one objective, such as profits and market share.

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60 views10 pages

Decision Making for Business Leaders

This document discusses different formulations for decision makers and objectives. It covers: 1) Single goal/single decision maker formulations that either do not incorporate risk and utility, using metrics like internal rate of return and present value, or do incorporate risk and utility using utility functions. 2) Utility functions can classify decision makers as risk averse, risk neutral, or risk loving based on the utility curve. 3) Multiple goal formulations with a single decision maker aim to achieve more than one objective, such as profits and market share.

Uploaded by

scribed_fan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Decision Makers & Objectives

 Single goal/Single decision maker formulations


Selection of business plan or marketing option
 Without incorporation risk & utility
 Internal Rate of Return(Long run)

 Present Value

 Rate of return on investment (Short Run)

 Incorporating risk & utility


 Utility function
 Risk averse
 Risk neutral
 Risk Lover
 Multiple Goal Formulations single decision maker
 More than one objectives to achieve Like market share as well as profits
Single goal/Single decision maker
formulations
 Without incorporation risk & utility
 Internal Rate of Return(Long run)

 Present Value

 Rate of return on investment (Short Run)

Add Problem of IRR here


Single goal/Single decision maker
formulations
 Incorporating risk & utility
 Utility function – Define utility function from utility pattern

 Risk averse

 Risk neutral

 Risk Lover
Deciding Objective
 Lottery 1
Utility value of lottery 1= 0.4(Utility value of $300) + 0.6(Utility value of $100)

= 0.4 X 26 + 0.6 X 18

= 21.2

 Lottery 2
Utility value of lottery 2= 0.5(Utility value of $450) + 0.6(Utility value of $0)

= 0.5 X 30 + 0.5 X 10

= 20

Utility value of lottery 1 > Utility value of lottery 2


Risk Profile

Utility Table
Graph is concave indication of risk averse
 Lottery 1
Utility value 200000 = 0.5(Utility value of $400000) + 0.5(Utility value of
$0)
= 0.5 X 0 + 0.5 X 160
= 80
 Lottery 2
Utility value $100000 = 0.5(Utility value of $200000) + 0.5(Utility value of $0)

= 0.5 X 80 + 0.5 X 0

= 40

 Lottery 3
Utility value -$50000 = 0.5(Utility value of -$100000) + 0.5(Utility value of $0)

= 0.5 X -40 + 0.5 X 0

= -20
Utility Function Risk Profile
$ Value Utility
-100000 -40
200000 80
400000 160

Utility Table
Utility Function U(X) = .0004 X
Risk Profile is Neutral as linear utility
function
Multiple Goal Formulations
single decision maker
Thank You!

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