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AU Expected Value for Profitable Decisions Journal

AU Expected Value for Profitable Decisions Journal


1: Choosing Based on Expected Value

In a project where we were determining whether to invest in a new product line, I came across the concept of expected value. Three possibilities were available for the choice: options A, B, and C.

Option A had a 60% chance of making a $100,000 profit and a 40% chance of making nothing. There was a 50% probability that Option B would make a profit of $150,000 and a 50% chance that it would make a profit of $50,000. Option C had a 70% chance of making a $80,000 profit and a 30% chance of making nothing.

I multiplied the likelihood of each result by the corresponding payout for each choice to determine the expected value before adding the outcomes. Option A’s expected value was 0.60 * $100,000 + 0.40 * $0 = $60,000. The expected value for Option B was 0.50 * $150,000 + 0.50 * $50,000 = $100,000. The predicted value for Option C was 0.70 * 80,000 + 0.30 * 0 = $56,000.

The unpredictability of the results was the danger associated with these expectations. Option B offered the most significant potential reward, but because there were two conceivable results, it also had the highest unpredictability. Although the payments for Option A and Option C were lower, their outcomes were more predictable.

We needed to learn more about market trends, client preferences, and future competitors to reduce uncertainty. More information on the chances and potential rewards may be obtained by conducting in-depth market research, examining customer surveys, and examining the competitive environment.

The choice to pursue Option B with a $100,000 projected value should be determined in light of the estimates and risks. The potential payoff outweighs the risk despite the larger unpredictability, and further research is needed to improve the probability.

Adverse Selection and Moral Hazard in Part 2

In a recent management situation, we had to deal with the difficulty of hiring practices that included unfair selection. Some candidates hired for new positions lied about their credentials and experience, which could have caused a mismatch between their skills and the demands of the position. Reduced productivity and higher turnover rates were the results of this.

We put numerous strategies into practice to address the adverse selection issue:

  1. We improved the screening procedure by conducting more in-depth reference checks, skill evaluations, and background checks. This enabled us to weed out applicants who overstated their qualifications.
  2. Before making full-time commitments, we provided internships or trial runs to evaluate candidates’ performance.
  3. In order to access a more trustworthy pool of candidates, we formed connections with respected educational institutions.

Part 3: The Principal-Agent Issue and Motivation

The principal-agent issue is illustrated by the challenge of leading a distant workforce. I want the people on my team to work hard and achieve deadlines, but they might not feel the same responsibility outside of the workplace. To solve this, I implemented performance-based incentives, such as bonuses for hitting goals.

The use of incentives is not without risk, however. It could cause unwanted behaviours, such as team members putting quantity before quality to hit deadlines rapidly. Additionally, it could foster unproductive rivalry and resentment among team members. I ensured the incentive system was well-balanced, concentrated on individual and team success, and matched the company’s overarching objectives to reduce these risks.

I can analyse decision-making under uncertainty, create incentive structures that encourage desired behaviours, and deal with information asymmetry issues better in my professional life if I use what I have learned from this course. Making informed decisions, maximising results, and promoting a more productive workplace will all be made more accessible.

AU Expected Value for Profitable Decisions Journal




Identify a situation from your own experience that involves making decisions using expected value, and detail the different options, expectations, and payouts. Discuss the risks involved with those expectations and, if applicable, the payouts. Include in your discussion an explanation of how to determine how much information to gather to minimize uncertainty. Finally, explain which decision should be made.

Your journal entry must be at least 200 words in length. Use Study guide 6  for references along with internet

Reading for part 1

Unit VI Study Guide

Chapter 17: Making Decisions with Uncertainty

  • Chapter 18: Auctions

Unit Resource (1 article): See Study Guide

  • Part 2
  • Instructions
  • Identify an example of a management scenario from your own experiences or current events involving adverse selection or moral hazard. Describe some methods to correct the potential problems of the asymmetric information.

Your journal entry must be at least 200 words in length. Used Study Guide 7 for information and reference material along with internet sites

Reading for Part 2

Unit VII Study Guide attached

Chapter 19: The Problem of Adverse Selection

Chapter 20: The Problem of Moral Hazard

Part 3

  • Instructions

Part I: Describe an example you have experience with of the principal-agent problem (for example, you have a desire for your children to listen in school and do well, while for them, goofing off at school might be much more fun), and explain how incentives can be used to overcome the principal-agent problem (such as paying your children for good grades). Include in your explanation an analysis of the risks in using incentives.

  • Part II: How will you be able to apply what you learned in this course to your current or future work?
  • Your journal entry must be at least 200 words in length. No references or citations are necessary.
Reading for part 3
Unit VIII Study Guide

Chapter 4: Extent (How Much) Decisions

Chapter 21: Getting Employees to Work in the Firm’s Best Interests

Chapter 22: Getting Divisions to Work in the Firm’s Best Interests


BOOK FOR CLASS Managerial Economics

  • Luke M. Froeb; Brian T. McCann; Michael R. Ward
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