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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
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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
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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
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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
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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.
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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
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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
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