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Chapter 2

Risk and uncertainty

3.1 Introduction

 All organisations face risk and uncertainty resulting in a
variability of possible returns.

 An organisation must consider risk as part of their planning
process.

A number of tools are available for making decisions where there is
an element of risk/uncertainty involved. Four key tools will be
explored here.

3.2 Expected value (EV)

 The average return if the decision is repeated again and
again.

 EV = Σpx where x = value of possible outcome and
p=probability of outcome.

Suitability of tool for organisation

 Suitable if organisation has a risk neutral approach to risk.

 The organisation would commit to the course of action that would deliver the
highest average outcome (EV).

 Not useful for one off decisions.

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