Risk and Decisions

Catalog description

Introduction to decision-making under uncertainty. Mathematical probability and statistics, decision theory and game theory will be studied. R M 301 Risk and Decisions (3) Most tough business decisions involve risk. Smark risk-taking requires special analytical problem solving skills and careful consideration of the relevant data. In this course, you will learn how to conceptualize decisions involving risk, how to analyze your choices, how to estimate the risk, and how to communicate and defend your analysis to others. The skills and tools you will learn come from economics, probability, statistics, and game theory. The focus will be on how the tools from these fields are applied to real world business decisions in risky environments. The concept of risk diversification will be discussed under both independent and correlated risks. Decision rules such as expected value maximization and expected utility maximization will be covered. The role of risk aversion of the decision-making process will be discussed along with how it can be measured. The study of decision analysis will include the use of decision tress. The basic concepts in game theory will be introduced. Students will learn what a Nash equilibrium is and how to derive such an equilibrium. More complicated games with incomplete information will be introduced which are important in decision-making where parties often are missing key pieces of information but must still choose a business strategy. Problems of asymmetric information will be studied; these situations arise when one party to a transaction or contract has more information relevant to the decision than the other party. For these types of problems, such as adverse selection and moral hazard, optimal solutions will be discussed.