Decision Makers & Objectives

 Single goal/Single decision maker formulations

Selection of business plan or marketing option
 Without incorporation risk & utility
 Internal Rate of Return(Long run)

 Present Value

 Rate of return on investment (Short Run)

 Incorporating risk & utility

 Utility function
 Risk averse
 Risk neutral
 Risk Lover
 Multiple Goal Formulations single decision maker
 More than one objectives to achieve Like market share as well as profits
Single goal/Single decision maker
formulations
 Without incorporation risk & utility
 Internal Rate of Return(Long run)

 Present Value

 Rate of return on investment (Short Run)

Add Problem of IRR here

Single goal/Single decision maker
formulations
 Incorporating risk & utility
 Utility function – Define utility function from utility pattern

 Risk averse

 Risk neutral

 Risk Lover
Deciding Objective
 Lottery 1
Utility value of lottery 1= 0.4(Utility value of $300) + 0.6(Utility value of $100)

= 0.4 X 26 + 0.6 X 18

= 21.2

 Lottery 2
Utility value of lottery 2= 0.5(Utility value of $450) + 0.6(Utility value of $0)

= 0.5 X 30 + 0.5 X 10

= 20

Utility value of lottery 1 > Utility value of lottery 2

Risk Profile

Utility Table
Graph is concave indication of risk averse
 Lottery 1
Utility value 200000 = 0.5(Utility value of $400000) + 0.5(Utility value of
$0)
= 0.5 X 0 + 0.5 X 160
= 80
 Lottery 2
Utility value $100000 = 0.5(Utility value of $200000) + 0.5(Utility value of $0)

= 0.5 X 80 + 0.5 X 0

= 40

 Lottery 3
Utility value -$50000 = 0.5(Utility value of -$100000) + 0.5(Utility value of $0)

= 0.5 X -40 + 0.5 X 0

= -20
Utility Function Risk Profile
$ Value Utility
-100000 -40
200000 80
400000 160

Utility Table
Utility Function U(X) = .0004 X
Risk Profile is Neutral as linear utility
function
Multiple Goal Formulations
single decision maker
Thank You!