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Risk and Uncertainty

5.2 Payoff tables

A payoff table (or profit table) can be a useful way to represent and
analyse a scenario where there is a range of possible outcomes and a
variety of possible responses. A payoff simply illustrates all possible
profits/losses.

When evaluating alternatives, management decisions will depend upon
risk appetite/attitudes to risk. To consider the risk borne by each
alternative it is necessary to consider ALL the different possible
profits/losses that may arise. A payoff table is simply a table that
illustrates all possible profits/losses.
Daily supply

Probability 40 salads 50 salads 60 salads 70 salads

40 salads 0.10 $80 $0 $(80) $(160)
Daily 50 salads 0.20 $80 $100 $20 $(60)
demand
60 salads 0.40 $80 $100 $120 $40
70 salads 0.30 $80 $100 $120 $140

 These show the profits that can be made from different possible outcomes.
There are normally two factors to consider – demand (which forms one axis of
the table) and supply (which forms the other axis).

 The table shows the different profits from each different combination of demand
and supply. For example, if there are 3 different supply (or order) levels, and
three different possible demand levels then there will be 9 (3 × 3) different
potential profit levels.

 Probabilities are used on these different profit levels to calculate expected
profits (which are then used for decision making).

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