Question

Discuss decision making under conditions of uncertainty, specifically using expected monetary value

Answer 1

Answer with Explanation:

The decision making under the conditions of uncertainty:

Uncertainty is an unquantifiable outcome of a decision that can not be mathematically modeled whereas risk is a quantifiable outcome of a decision that can be mathematically modeled.

The expected value method helps in decision making related to uncertainty are making prudent estimates of cash flow by using expected value.

Expected value considers every outcome under uncertainty and computes all of the expected value for each outcome. The outcome that gives highest expected value is said to be best case and likewise the outcome that gives lowest expected value is said to be worst case.

Suppose that two projects gives the same expected value, then the decision will be based on the degree of uncertainty which means the project that has lowest uncertainty of returns will be our choice.

The deviation of the expected value from required return on a project can be measured as a Degree of uncertainty that helps in understanding to what extent the return will be not as per the expectation. The Precise Measurement of uncertainty can be calculated by inclusion of standard deviation to estimate expected value of the decision taken.

The expected money value is the monetary value that a particular decision will generate. In expected monetary value the decision is based on the weighted average of best case and worst case. The value derived is average thus the standard deviation would be very low which means that the calculation was precise. Decision trees are used in precise measurement of cash flow related to each expected outcome and deriving a weighted average value.