Behavioral Decision Making andRisk Management.ppt

Behavioral Decision Making and Risk Management X.T. Wang Email: xtwang@ Content and Topics Key Features of the Course Research and Applications Aims of the Course Management and Risky Choice Define Risk with Personal Examples Human Decision Making Risk is the essence of life, which keeps the mind busy perceiving, feeling, thinking and deciding. Risk demands choice, choice means freedom, and freedom has its cost. A life story can be viewed as a temporal sequence of risky choices. Management is decision making. Decisions determine success or failure. Diligence and hard work cannot warrant correct decisions（e.g., beginner of swimming） Understand the process and mechanisms of decision making under uncertainty Business Environment and Cognitive Process of Management Dealing With Uncertainty Characteristics of Uncertain Business Environment Market Uncertainty System and Policy Uncertainty Risk Technical Uncertainty Management Uncertainty Reactions of Successful Business Leaders to Uncertainty Three Kinds of Decisions Decisions under certainty Decisions under uncertainty Decisions under risk Certainty, Uncertainty, Risk, and Fate Life = “Destiny” (Determined) + “Luck” (Variable) + “Effort” (Controllable) Personality determines personal fate: Modesty is not only an attitude towards life but also a judgment about uncertainty. Three Research Approaches ? Normative approach: What the optimal choice or decision would be ? Prescriptive approach: What people should do Descriptive approach: What people actually do ? Assumptions of Decision Making Theories Expected utility maximization (Normative theory of risky choice） 2. Risk (variance) minimization (Economic and finance models of risky choice) 3. Reference point-dependent value functions (Psychological models of risky choice) Models of Risky Choice  Expected Utility Theory provides normative solutions for risk taking: n EU = ?piu(vi) i =1 Utility Measures and Analysis Util