Exam 2 RMI 2302 - FSU Dr. Nyce

Who uses decision making ?

Individuals

Organizations

Government

Individuals use expected ____

Utility

Organizations use expected ____

Value

What entity is able to take on risk regardless of the reward

Gov't

What is one of the big problems we have with modeling how decisions are made?

Decisions are made is that they do not explicitly account for biases on the part of the decision maker

What is Bias?

an inclination of temperaments or outlook to present or hold a partial perspective at the expense of alternatives in reference to objects, people, or groups.

Types of Bias 1 of 5

1. Age biases

Types of Bias 2 of 5

2. Cultural biases

Types of Bias 3 of 5

3. Experience biases

Types of Bias 4 of 5

4. Gender biases

Types of Bias 5 of 5

5. Media biases

Age Biases

People in certain age groups tend to interpret

information about risk differently

Cultural Biases

Certain culture view of risk differ. (example: religion biases)

Experience Biases

People who have experienced a low-probability/high-consequence event tend to overestimate its likelihood, people who have not experienced one, tend to underestimate (example: control biases)

Gender Biases

(these are not systematic- you cannot say all men or all women think a certain way)

Media Biases

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

CAPM

The Capital Asset Pricing Model - only reward systemic risk and not worried about diversifiable risk.

What is Efficient Frontier

a graph that shows the tradeoff between risk and reward.

What does the Efficient Frontier line represent?

Represents the optimal combination of risk and return

What is an incentive

something that motivates individuals to perform an action

What are the types of incentives: 1 of 7

1. Financial

What are the types of incentives: 2 of 7

2. Moral

What are the types of incentives: 3 of 7

3. Natural

What are the types of incentives: 4 of 7

4. Coercive

What are the types of incentives: 5 of 7

5. Personal

What are the types of incentives: 6 of 7

6. Social

What are the types of incentives: 7 of 7

7.Political

Financial Incentive

expect some form of material reward in exchange for acting in a particular way.

Moral Incentive

"do the right thing"

Natural Incentive

"curiosity, fear, anger, pain, joy, pursuit of happiness"

Coercive Incentive

negative reinforcement

Personal Incentive

motivate an individual through their tastes, desires, and the ambition to achieve remarkable feats.

Social Incentives

takes into account the situation faced by any individual in a given position within a given society by taking into account practices, rules, and societal norms

Political Incentives

effect the Short Term Planning which is the opposite of what we want our government to do. We want them to think Long Term

How does an organization get people to buy/use its products?

Advertising

Loyalty Programs

What is the Study of Economics

is basically a study of incentive systems

The Law of Unintended Consequences

outcomes that are not the ones intended by a purposeful action. Someone will cheat the game.

What are 'Smart' Pills?

Stimulant drugs such as Ritalin and Adderall have been develop to help manage ADHD.

Who writes the article that smart pills are dangerous?

Alan Schwarz

What case does Alan Schwarz use?

Case on Richard Fee

Richard Fee

Baller in all aspects of life, but committed suicide 2 years after college addict to adderall.

What do Alan Schwarz believe the problems with the health care system are? 1 of 4

1.Quick Diagnosis

What do Alan Schwarz believe the problems with the health care system are? 2 of 4

2.Ability to manipulate/feign symptoms

What do Alan Schwarz believe the problems with the health care system are? 3 of 4

3.Quick to medicate

What do Alan Schwarz believe the problems with the health care system are? 4 of 4

4.Doctor Shopping

Who writes the article that smart pills aren't dangerous?

Joshua Gowin

What does Joshua Gowin say?

No different than other stimulants, they work so just them. Just more sophisticated

Different individual risk management levels 1 of 7

1. Property

Different individual risk management levels 2 of 7

2. Liability

Different individual risk management levels 3 of 7

3. Life

Different individual risk management levels 4 of 7

4. Premature Death

Different individual risk management levels 5 of 7

5. Long Life

Different individual risk management levels 6 of 7

6. Health

Different individual risk management levels 7 of 7

7.Financial

What is lost exposure?

any condition or situation that presents a possibility of loss, regardless of whether that loss actually occurs.

What are the three elements to a loss exposure 1 of 3

1. Asset exposed to loss

What are the three elements to a loss exposure 2 of 3

2. Cause of loss

What are the three elements to a loss exposure 3 of 3

3. Financial consequences of the loss

What are some examples of asset that can be lost if exposed?(Property)

Real property(Land etc)

Personal property (art etc)

What are examples of some causes of loss? (Property)

Fire, theft, windstorm, accidents, lost

What are some examples of Financial Consequences?

(Property)

Reduction in property value

Increased expenses

Lost Income

What are some examples of assets exposed to loss?

(Liability)

Money/other financial assets

General Damages

(someone lost income because you hurt them and they cannot work due to the injury). no specific dollar amount

Special Damages

(harder to quantify, loss of consortium - wife sues you for killing her husband, pain/suffering - permanent back damage)

Punitive Damages

(punishment to make sure you don't do it again). People use this as a way to cheat the system and get a "lottery ticket" to receive money.

Claim

To make a demand for money, for property, or for enforcement for a right provided by law.

Lawsuit

Legal action by one person or entity against another person or entity

Civil Law

That part of the law that encompasses business, contracts, estates, domestic (family) relations, accidents, negligence and everything related to legal issues, statutes and lawsuits

Criminal Law

Those statutes dealing with crimes against the public and members of the public, with penalties and all the procedures connected with chagrinning, tying sentencing and imprisoning defendants convicted for crimes.

Tort

a civil wrong or wrongful act, whether intentional or accidental, from which injury occurs to another

Contract

an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return

Statutory

a written offer of a specific sum of money made by a defendant to a plaintiff, which will settle the lawsuit if accepted within a short time

Negligence

failure to exercise the care toward others which a reasonable or prudent person would do in the circumstances, or taking action which such a reasonable person would not.

What are the different types of damages

GPS

What are the different types of damages 1 of 3

1. General Damages

What are the different types of damages 2 of 3

2. Punitive Damages

What are the different types of damages 3 of 3

3. Special Damages

Specific Types of Liability: 1 of 5

1. Property owners

Specific Types of Liability: 2 of 5

2. Automobiles

Specific Types of Liability: 3 of 5

3. Employer-employee (this relationship doesn't stop when you leave work, the employer is liable for employee's actions)

Specific Types of Liability: 4 of 5

4. Parents and children

Specific Types of Liability: 5 of 5

5. Animals

Individual Risk Management: Risk Management Process:

1. Determine Objectives

2. Identify Risks

3. Evaluate Risks

4. Choose your alternatives

5. Implement

6. Review & Evaluate

In which age category do you face the highest risk of premature death?

your 40s

Types of Risk for Corporations

• Business risk

• Operational risk

• Hazard risk

• Financial risk

• Strategic risk

• Legal risks

• Liability risks

• IT risks

• Reputational Risk - our professor includes this risk under strategic risk

Business Risk

Deviations in profitability. This is a very broad category of risk that is caused by operational, hazard, financial, or strategic risks.

Operational Risk

Potential losses from internal sources:

• Manufacturing processes

• Fraud

• Mismanagement

• Employee mistakes

Hazard Risk

describe potential losses that only have a down side (pure risks),

Peril

the immediate cause of loss

Hazard

condition of affecting the frequency or severity of loss. They affect perils.

Financial Risk

Potential variation due to financial causes

Strategic Risks

potential losses (variation) from poor business decisions:

o Product mix

o Supplier choice

o Financing options

EX) Business Location

Theme cases of BP

cases = CCPPW

Theme cases of BP 1 of 5

1. Corporate Strategy

Theme cases of BP 2 of 5

2. Corporate Culture

Theme cases of BP 3 of 5

3. Public Relations

Theme cases of BP 4 of 5

4. Process Management

Theme cases of BP 5 of 5

5. Workplace Safety

First Case of BP was?

March 25,2005

Explosion at Texas City Refinery

Second case BP was?

March 2006

Oil Spill at Prudhue Bay, Alaska