8/14/2019 Risk Tolerance & Desirability

1/8

Risk Tolerance& Desirability

Risk Tolerance is. . .

your willingness to takerisk in your quest forbetter consequences.

How can you take yourpersonal risk toleranceinto account?

Robs Cataract Surgery

1

2

Alternatives Uncertainty Consequences

Cataract surgery

No cataract surgery

Decision Uncertainty

Successful

90%

Unsuccessful

10%

20/30 vision,No fuzziness

20/100 vision,Fuzziness

20/50 vision,Fuzziness

Robs Cataract Surgery

8/14/2019 Risk Tolerance & Desirability

2/8

Are you:

Risk Averse?

Risk Neutral?

Risk Seeking?

What would youdecide?

50/50 chance ofwinning $10,000 orlosing $5,000

The more you wantthe betterconsequences, themore risk youll bewilling to take to getthem.

What would youdecide?

75/25 chance ofwinning $10,000 orlosing $5,000

The more likely thebetter outcomes,the more desirable

the risk will be toyou.

What would youdecide?

50/50 chance ofwinning $10 orlosing $5

8/14/2019 Risk Tolerance & Desirability

3/8

IncorporatingRisk Tolerance:

QualitativeApproach

Robs Cataract Surgery

1

2

Alternatives Uncertainty Consequences

Cataract surgery

No cataract surgery

Decision Uncertainty

Successful

90%

Unsuccessful

10%

20/30 vision,No fuzziness

20/100 vision,Fuzziness

20/50 vision,Fuzziness

Qualitative

Think hard aboutrelative desirabilityof each alternativesconsequences

Balance desirabilityof consequences

with their chancesof occurring

Choose the mostattractive alternative

8/14/2019 Risk Tolerance & Desirability

4/8

Quantitative Approach toRisk Tolerance

First, assign desirability scores to all

consequences

Then calculate each consequencescontribution to the overall desirability

of the alternative

Calculate each alternatives overalldesirability score

Compare and choose

Marisas Job Decision

8/14/2019 Risk Tolerance & Desirability

5/8

100%

GoodExcellentExcellent25%London

Very goodGoodGood75%Buenos Aires

SocietyJobLivingChanceOutcome

ConsequencesUncertainty: Location

ALTERNATIVE: CONSULTING FIRM

100%

ExcellentFairPoor10%Santiago

FairExcellentVery good90%New York

SocietyJobLivingChanceOutcomeConsequencesUncertainty: Location

ALTERNATIVE: ACCOUNTING FIRM

Marisas Risk Profile

04EFPSantiagoAccounting

503VGGGBuenos AiresConsulting

802FEVGNew YorkAccounting

1001GEELondonConsulting

Des. Sc.RankSocietyJobsLivingOutcomeAlternative

Consequences

Marisa ranks & scores outcomes

Alternatives overall desirability 62.5100%

25.010025%London

37.55075%Buenos Aires

ContributionDesirability ScoreChanceOutcome

CONSULTING FIRM

Alternatives overall desirability 72.0100%

0.0010%Santiago

72.08090%New York

ContributionDesirability ScoreChanceOutcome

ACCOUNTING FIRM

Marisa calculates the overalldesirability of each alternative

Pitfalls to watch for. . .

Dont over-focus on the negative Consider the full range ofconsequences, not just the bad ones.

8/14/2019 Risk Tolerance & Desirability

6/8

Dont fudge the probabilities to accountfor risk.

Judge chances on their own merits.Account for your risk toleranceseparately.

Avoid foolishoptimism

Think hard andrealisticallyabout what cango wrong aswell as whatcan go right.

Dont ignore significant uncertainty Develop risk profiles for each alternativewhich captures the essence of theuncertainty

8/14/2019 Risk Tolerance & Desirability

7/8

Dont avoid making risky decisionsbecause they are complex.

You can deal sensibly with complexityand reach a smart choice.

But how should youhandle risk that exceedsyour comfort level?

Managing Risk

Louise Lewis &Drilling for Gas

Risk ManagementTechniques

Share the risk

8/14/2019 Risk Tolerance & Desirability

8/8