RMI

What is relative risk index?

A method of comparing the odds of something affecting a specific group with the odds of something affecting the entire population.

According to "Scientific View of Risk" most risks are relative. What does this mean?

Any given risk should be weighed with other risks or lost benefits that can result from attempts to reduce the given risk.

Which of the following is extremely useful for the utilization of the rollback technique?

Constructing a decision tree

"Risk management is fundamentally a question of values. In a democratic society, there is no acceptable way to make these choices without involving the citizens who will be affected by them." What does this statement mean?

Everyone possibly affected by a risk should have a say in the reduction or response to a risk.

According to "Innovation Risk: How to Make Smarter Decisions", which one of the following was NOT one of the simultaneous factors of the recent financial crisis?

High interest rates

Which of the following is NOT a federal agency created to help us manage and reduce risk?

Internal Revenue Service

Google, Inc. has three potential investment opportunities following the release of their driverless car prototype. Which of the following should they pursue? Investment A Probability / Outcome .55 / 20% .20 / 10% .25 / -5% Investment B Probability / Outcome .60 / 15% .30 / 12% .10 / -10% Investment C Probability / Outcome .50 / 20% .28 / 12% .22 / -3%

Investment C

What is the answer to the Module 4 - Presentation Question #4?

It depends on the marginal cost of studying

What is the answer to the Module 4 - Presentation Question #3?

It is the utility equivalent

The ___________ principle of decision-making stipulates that a decision-maker's view is usually extreme optimism.

Maximax or Minimin Principle

Sue is a very bright college student who stays up to date on all the news channels. In response to the number of child abductions she has seen on the news lately, she insists that her mother purchase a child harness for her younger brother. What type of bias is this?

Media

A matrix of conditional values associated with all possible combinations a series of events is a:

Pay-off Table

What is the answer to Module 3: Presentation Question #3?

Risk permeates nearly every decision you make

The owner of a private language school has a profit of $50,000 for the year. She has the option of saving the $50,000 for future opportunities or investing all of this amount in a new classroom facility. The investment has a 50% probability of gaining $20,000 and a 50% probability of losing $35,000. ($15,000 left) If she has a square root utility function, what should the school do?

Save for future opportunities, the utils from saving (223.60) are greater than the utils from the investment (193.5).

Hazards may be categorized by which of the following groups?

Tangible (Physical) and intangible

In the decision-making process, opportunity loss, or regret, occurs when:

The optimal course of action is not adopted

What is the answer to Module 3: Presentation Question #4?

True

What is the answer to the Module 2 - Presentation Question #5? True or False: In the lecture I said any choice was acceptable.

True

The claim that decisions are made to maximize expected utility rather than expected monetary value is the major component of which of the following?

Utility theory

Karen won't allow any of the neighborhood children into her yard because she has a large swimming pool and doesn't want anyone to fall in, resulting in her being responsible for the harm of a child. What type of risk is Karen trying to avoid?

liability

According to "Thinking Like An Economist", opportunity cost is best defined as

the value of all that must be sacrificed in order to benefit

The LaPlace Principle:

treats uncertain events as equally probable.

As an application of the "number of days" lost measure of risk discussed in "Scientific View of Risk" consider the following 2015 statistic. Today's life expectancy is well into the 80s. What percentage of life-long smokers die before the age of 70?

50%

What is the answer to the Module 4 - Presentation Question #1?

A is the most common answer

According to "Thinking Like an Economist", which of the following is NOT a common pitfall of decision-making?

All of the above are common pitfalls in decision making.

What is the answer to Module 3: Presentation Question #2?

Ask.com/Google

It is not easy to determine what additional reward is necessary for governments or society to take additional risk because:

Both: sometimes governments are the only entity with the ability to take certain risks and the social benefits of some risks are difficult to measure

When considering the risk involved in a specific activity,

Danger and Risk are not always correlated

Nyce Vineyards is evaluating the impact of climate change on its several types of grapes grown. There are several alternatives for planting multiple varietals that will ultimately determine their success. In order to select between the alternatives to find the optimal choice, Nyce Vineyards should use:

Decision Theory

Which of the following determines optimal strategies when a decision maker is faced with several different alternatives and a risky pattern of future events?

Decision theory

According to "Innovation Risk: How to Make Smarter Decisions", which of the following is NOT one of the five rules of thumb to minimizing risk?

Determine which risks are being faced

Which of the following is a way organizations utilize opportunity cost in their calculations?

Discounting

Static risks

Do not change over time

What field basically studies incentive systems?

Economics

"Innovation Risk: How to Make Smarter Decisions" says that models can only be meaningfully evaluated as a triplet. What does this mean?

Equal consideration must be given to the model, application, and user.

What is the optimal choice with the strategy that has the highest expected pay-off?

Expectation Theory

What is the answer to the Module 4- Presentation Question #5?

Externalities

What is the answer to the Module 4 - Presentation Question #2?

False

According to "Innovation Risk: How to Make Smarter Decisions", the infrastructure should be changed based on every new innovation.

False - There are frequent innovation to infrastructure so the changes to infrastructure would be constant.

The Expectation Theory: I. is the best method for making decisions currently available II. is seldom used by organizations

I Only

The ranking of risks by severity is important because: I. An idea of severity can help classify risks faced by an organization II. Severity can help determine the amount of insurance needed III. Severity can establish how often a risk faced by a company will occur

I and II

Which of the following statements regarding the element of time in measuring risk is/are correct? I. An individual's risk varies with habits II. Time element measurement ignores some information III. Time element measures a specific moment in time.

I and II

Marginal Cost and Benefit calculations: I. Measure activity incrementally II. Are useful in determining the level at which activity stops III. Are sometimes referred to as average cost and benefits

I and II only.

According to "Scientific View of Risk", how can risk probabilities be misused? I. Ignoring time element II. Considering hypothetical "averages" III. Not considering the number of people engaged in the activity

I and III

According to Von Neumann and Morgenstern's Utility index, decisions are made to maximize... I. Expected utility II. Expected monetary value III. Expected marginal loss

I only

The Utility Index proposed by Von Neumann and Morgenstern: I. is designed for predictive purposes II. enables decision making based on preferences III. measures utility in situations where risk exists

I, II, and III

Decision Theory: I. provides the framework for decision-making when conditions are certain. II. determines optimal strategies when faced with several alternatives and a risky pattern of future events.

II Only

Tom is faced with a situation in which he must make a decision. Which of the following best describes the ORDER of the steps of the decision making process Tom should use to come to a decision?

Identify the outcomes, identify the courses of action, determine the pay-off function and then choose from the alternatives.

Greg and Emily were tasked with developing a model of how an individual may purchase lottery tickets. Greg's model for determining ticket purchases incorrectly assumes all people are equally likely to play the lottery. Emily's model correctly assumed that lottery ticket purchases vary with income and education levels and found very different results than Greg's model. Which of the following describes Greg's model?

Incorrect

A restaurant owner has a net profit of $125,000. She has the choice of taking this amount as salary for herself or investing all of it in another location that has recently become available. There is a 50% chance the second location will have a net gain of $200,000 from the investment, and a 50% chance it will lose $75,000. ($50,000 left). Assuming she has a square root utility function, what should she do?

Invest in the new location. Taking the salary Utils is $125,000.5 = 353.55 Investing Utils is .5(325,000.5) +.5(50,000.5) = 396.84

Joe has $5000. He has an opportunity to invest in a new smart phone app being designed by a friend. He would invest $2500 for this project, keeping $2500 in reserve. He has a 50/50 chance of earning $6000 above the initial investment amount or losing the entire amount invested due to a failure to sell. Assuming he has a square root utility function, Joe should:

Invest in the project. The saving option Utils is $5000.5 = 70.711 The investment option Utils is .5((5000-2500+6000).5) + .5(5000-2500.5) = 71.098

Apple, Inc. has three choices of which new technologies to acquire for the development of its new MacBook Pro display. Which of the following should Apple pursue? Investment A Probability / Outcome .35 / 25% .33 / 20% .32 / -10% Investment B Probability / Outcome .65 / 20% .20 / 12% .15 / -7.5% Investment C Probability / Outcome .70 / 15% .20 / 25% .10 / -4%

Investment C

Elon Musk is confident that SpaceX will land people on Mars by 2026. He currently has three choices of which new technologies to acquire for the development of its new rocket engine. Which of the following should SpaceX pursue? Investment A Probability / Outcome .70 / 20% .35 / 20% .40 / -10% Investment B Probability / Outcome .80 / 10% .40 / 25% .10 / -5% Investment C Probability / Outcome .65 / 20% .55 / 10% .15 / -1%

Investment C

How does the mathematical measure of Standard Deviation help risk mangers?

It measures the difference between what is expected to happen and what actually happens

This principle is adopted by pessimistic decision-makers who are most conservative in their approach.

Maximin or Minimax Principle

What is the answer to Module 3: Presentation Question #1?

Mercedes-Benz

According to "Thinking Like an Economist," this economist supported to concept that assuming rules of rational decision making always apply can give insight into human behavior.

Milton Friedman

According to "Innovation Risk: How to Make Smarter Decisions", you use models every day. Why is it that you don't recognize that you're using a model?

Models that apply to real-life situations are often applied semiconsciously.

What is the answer to Module 3: Presentation Question #5?

Multi-stage decision

Requirements for using a Payoff Matrix include all of the following except:

Must result in a sequence of decisions

A company has noticed employees taking a lot of sick time off around the flu season. They are concerned with the overall health of their employees and don't want them to catch/spread the flu. The company begins offering free flu shots for the employee and up to 4 family members. This is an example of:

Organizational Level Incentives

Which of the following actions describes a way organizations use expected value?

Organizations estimate the future cash flows that are generated by an investment and then discount them back to present value.

Political incentives often do what to the discount rate?

Political incentives often increase the discount rate.

According to "Thinking Like an Economist", economic risk analysis is on firmer ground when it comes to answering what type of question and why?

Positive questions; economic analysis questions what the consequences of specific policies or institutional arrangements will be

A national restoration contractor has $5 million to invest in new software to become more efficient in writing estimates and reducing errors, increasing net profits for the company. There are three products under consideration, each with a cost of $5 million to implement across the company. Which product should be purchased? Product A: Probability / Outcome .40 / 15% .35 / 8% .25 / -10% Product B: Probability / Outcome .45/ 17% .40 / 8% .15 / -12% Product C: Probability / Outcome .50 / 10% .30 / 5% .20 / -5%

Product B

Which of the following is the last step in the risk management process (but often done first)?

Review and Evaluate

The scientific approach to dealing with risk is called

Risk Management

A girl is given $15 by her parents. She has two options of how to spend the money. She can either save the money for future purchases or she can start a lemonade stand on her driveway. If she spends all of her $15 on the lemonade stand, there is a 50% probability she will lose $10 ($5 left) and a 50% probability she will profit $12 beyond her initial investment (a total of $27). Assuming the girl has a square root utility function, what should the girl do with the money?

Save her money, the utils from the $15 is 3.87, the utils from the lemonade stand is 3.71.

What is a main criticism of the mainstream media by risk professionals regarding risk?

The public often ends up underestimating common risks and exaggerating low risks.

Risk at the individual level can best be defined as

Uncertainty regarding loss

According to "Thinking Like an Economist", when does the invisible hand mechanism break down?

When costs of benefits accrue to people other than the decision-maker

According to "Innovation Risk: How to Make Smarter Decisions", the utility of a model depends on the model itself, why it's being used and which of the following?

Who is using the model

According to the reading "A Scientific View of Risk", innumeracy is:

a lack of intuitive understanding of numbers

The President of the United states is considering an executive order banning all coal mining in West Virginia. He asked his economic adviser the following question: "Should we fund a retraining program for coal company employees impacted by this decision?" This is:

a normative question

To improve the comfort of passengers, the FAA is considering an order to eliminate the sale of middle seats on flights longer than two hours. At a hearing, a senator asks, "If this order is implemented, what will be the effect on main cabin air fare?" This is:

a positive question

The reading "A Scientific View of Risk" has a different definition of risk than we have used in class. The definition used in this reading added what component to the definition?

a time element (given period of time)

What is the answer to the Module 2 - Presentation Question #3?

a. 0-5%

What is the answer to the Module 2 - Presentation Question #1

a. the child will become president or win a nobel prize

What are some non-monetary costs of attempting to eliminate risks? I. Loss of Life II. Loss of Productivity III. Loss of Time

all three

What is the answer to the Module 2 - Presentation Question #2

c. 11-15%

What is the answer to the Module 2 - Presentation Question #4?

c. you use some type of probabilistic model

Which of the following is NOT a method of categorizing risk?

certain versus uncertain

A pay-off is a(n) __________ value in the sense that associated with each course of action is a certain profit/loss.

conditional

According to the text, which of the following is a recommended method of evaluating the best course of action in a multi-stage decision-making problem?

creating a decision tree

The decision situations wherein the decision-maker chooses to consider several possible outcomes and the probabilities of their occurrence can be stated are called _____________.

decisions under risk.

Which of the following is a common pre-loss objective?

economy

From the reading "Innovation Risk", the characteristics of a sound mathematical model include all of the following EXCEPT:

fewer than three variables

From the excerpt of "The Wealth of Nations" (in Thinking Like an Economist), how is the invisible hand developed?

from producers regard of their own self-interest

Risk prevention methods are best applied to?

high frequency losses

In the lecture, we applied some of the concepts of the article "Innovation Risk" to self-drive cars. Which of the following was NOT one of the rewards discussed with self-drive cars?

increased driver error

Donna has a home that is insured to its maximum value. She often leaves the door unlocked in case she forgets her keys. She knows that her insurance policy will pay for any losses if her home is robbed. Which of the following best applies to Donna?

moral/morale hazard

According to "Thinking Like an Economist", economists increasingly believe that the key to progress in macroeconomics lies in

more careful analysis of the individual markets that make up broader aggregates.

Imagine a world where health insurance doesn't exist. On the upside, you don't have to pay any health insurance premiums! On the downside, if you become sick you're responsible for the full amount of your healthcare. What if you had children? The risk of unknown payments for healthcare would require all of us to save a much larger amount of money to set aside just in case we needed it. This burden would be in which of the following categories?

need for larger emergency funds

Loss frequency describes which of the following?

number of losses

According to "Thinking Like an Economist," the Homo Economicus is:

only concerned with personal material cost and benefits.

Which of the following is not a category of risk retention?

primary versus secondary

Insurance is a mechanism for managing

pure risk

In "Thinking Like an Economist," the section "The Role of Economic Theory" states that many economists believe that useful insights into our behavior can be gained by assuming that we act as if governed by the rules of___________ decision making.

rational

Why should we measure loss severity?

risk classification determination of transfer (insurance) amount

Utility functions are normally a function of _____________. Choose which of the following best fits in the blank.

wealth