Risk Reduction Techniques in Management Decision Making Essay

2057 Words Dec 19th, 2010 9 Pages
Risk Reduction Techniques in Management Decision Making



1. Sensitivity Analysis

This is a technique that shows how different variables affect the value of a particular variable. For example, it shows the affect on profit following a change in sales price and/or volume.

Sensitivity analysis shows the sensitivity of economic payoffs to uncertain values such as discount rates. Management can see the profitability of a project if input values change [ (Marshall, 1995) ]. It is easy to use and understand. Therefore it is most useful when more advanced and time consuming techniques are not possible. Management can see which factors are the most influential in
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Therefore it is not appropriate for once off decisions [ (Lucey, 2002) ].

4. Decision Trees

Decision trees are a diagrammatic representation of the possible courses of action. Each course of action is represented by a branch.

Certain variables may be dependent on other variables and therefore there are many possible outcomes. Decision trees help make this easier to understand. It takes account of multiple variables in a clear way. The tree allows a complete strategy to be formed taking account of all the possibilities [ (Drury, 2008) ]. The decision tree may be more meaningful to management. They are most useful when management are dealing with difficult decisions with multiple possible outcomes. They also take account of probabilities.

They can only be used to evaluate specific criteria. Decision trees are more useful if there are a few relevant attributes but less so if there are many complex interactions [ (Rokach and Maimon, 2008) ]. Decision trees use expected values and therefore are subject to similar disadvantages as expected values as outlined above.

5. Perfect Information

This involves seeking extra information in order to reduce risk. Market research can be used to achieve this. The difference between the expected values under perfect information and under normal circumstances is calculated. The cost of the

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