Question

*What is the difference between risk and uncertainty?

*Different techniques of making decisions under risk, uncertainty, no risk or uncertainty, under risk and uncertainty.

*Why do we need to consider economic equivalence to evaluate alternatives (single and multiple)?

*What are the different economic equivalences that may be considered?

Answer 1

1. Risk is the potential of loss in any situation. Uncertainty is basically the absence of a clarity or clear direction towards the situation’s outcome. Risk is measurable and controllable while uncertainty is neither measurable nor controllable.
2. The different techniques of making decisions under risk, uncertainty, no risk or uncertainty, under risk and uncertainty are:
   1. Decision under risk: The following attributes help in decision making under any kind of potential or existing risk:
      1. The expected value rule
      2. The coefficient of variation rule
      3. The mean-variance rule
   2. Decision under uncertainty: To make decisions under uncertain situation, the following rules can be used:
      1. The maximin rule
      2. The maximax rule
      3. The equal probability rule
   3. Decision under no risk and no uncertainty: In this situation, the past experience of the company as well as the facts of the current case, help in making a decision.
   4. Decision under risk and uncertainty: The following methodology can be used in this scenario:
      1. Risk analysis
      2. Tree diagrams
3. We need to consider economic equivalence to evaluate alternatives as it gives an idea about the feasibility of the alternative. The economic equivalence gives a fair idea of the impact of the alternative on project budget, if incorporated in the project.
4. The different economic equivalences that may be used to evaluate alternatives are:
   1. Annual worth of the alternative
   2. Present worth of the alternative
   3. The expected value