Schaum's Outline Series

CHAPTER 6 Risk Analysis and Management 93
EXAMPLE 6.2
Consider two dice. Consider a rolling a 7 as an undesirable event that would make
you lose a pot of $60. Calculate the risk probability and the risk impact of rolling a
7. Calculate the risk exposure.
The risk probability is 6 cases out of 36 combinations, or 1/6. The risk impact is
$60. The risk exposure is 1/6 times $60, or $10.
6.4.1 RISK DECISION TREE
A technique that can be used to visualize the risks of alternatives is to build a risk
decision tree. The top-level branch splits based on the alternatives available. The
next split is based on the probabilities of events happening. Each leaf node has the
risk exposure for that event. The sum of the risk exposures for all leafs under the
top-level split gives the total risk exposure for that choice.
EXAMPLE 6.3
A friend offers to play one of two betting games with you. Game A is that you toss
a coin twice. He pays you $10 if you get two heads. You pay him $2 for each tail
you toss. Game B is that you also toss a coin twice, but it costs you $2 to play and
he pays you $10 if you get two heads. Which game should you play?
The risk decision tree is shown in Fig. 6-1. Both games total to $0.50. Thus,
each time you play, your average gain is 50 cents. No matter which game you
choose.
Game A
Game B
2 heads _ 0.25
1 heads _ 0.5
0 heads _ 0.25
2 heads _ 0.25
1 heads _ 0.5
0 heads _ 0.25
Fig. 6-1
0.25 * $10 = $2.50
0.5 * _ $2 = _ $1.00
0.25 * _ $4 = _ $1.00
0.25 * $10 _ $2 = $2.00
0.5 * _ $2 = _ $1.00
0.25 * _ $2 = $0.50