Friday, March 30, 2012

Risk Assessment and Calculation

Risk Management
The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us.

Assumption of Risk calculation
1. Full information
2. Independent Trial
3. Relevance of Quantitative Valuations

Law of Large Numbers: The average of large number of throws will be more likely that the average of small number of throws to differ from the true average by less than some stated amount.


Prospects Theory
People make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using interesting heuristics
There is no difference other than in accounting conventions between a cost and a loss.
Probability judgments are attached not to events but to descriptions of events…..the judged probability of events depends upon the explicitness of its description.

Endowment Effect
A person's willingness to accept compensation for a good is greater than their willingness to pay for it once their property right to it has been established

Law of Averages
It is a lay term

Decision Theory
Most of the decisions are prescriptive.

The information you have is not the information you want.
The information you want is not the information you need.
The information you need is not the information you can obtain.
The information you can obtain costs more than you want to pay.

The utility resulting from any small increase in wealth will be inversely proportionate to the quality of goods previously possessed. – Bernoulli
There is a relation between the evidence and the event considered, but it is not necessarily measurable. - Unknown
Likeness to truth is not Truth – Socrates
Moral Certainty is less than certainty – Jacob Bernoulli
A person who never made a mistake, never tried a new thing - Albert Einstein
Under of conditions of uncertainty, the choice is not between rejecting a hypothesis and accepting it, but between reject and not reject. - Unknown
The true source of uncertainty lies in the intentions of others. – Game Theory

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