Risk Management Strategies
Various decision theory strategies for managing risk are possible. They are briefly described here. During collective decision making, various members of the decision group may be (implicitly) favoring one of these risk management approaches. This risk management may be happening even if the group members are not familiar with the names or descriptions of these strategies. It may be helpful to explicitly consider who is favoring which strategy and why they favor that strategy.
- Minimax decision theory is a decision-making approach that aims to minimize the maximum possible loss that could occur from any given decision. It is commonly used in situations where the decision maker faces uncertainty and must make decisions based on incomplete or imperfect information.
- Regret Minimization: This approach aims to minimize the maximum possible regret that could be experienced from any given decision. It involves comparing the expected outcomes of different choices against the best possible outcome that could have been achieved if the decision maker had perfect information.
- Expected Utility Theory: This approach measures the expected utility or expected value of each decision choice. It takes into account the probability of each possible outcome and the utility or value associated with each outcome. The decision maker chooses the option that maximizes their expected utility.
- Prospect Theory: This approach accounts for the fact that people often make decisions based on how they perceive gains and losses rather than on objective probabilities. It suggests that people evaluate potential outcomes based on a reference point and weigh the possibility of gains and losses differently.
- Maximin: This approach is similar to minimax, but instead of minimizing the maximum possible loss, it maximizes the minimum possible gain. It assumes that the decision maker is risk-averse and seeks to avoid the worst possible outcome.
- Lexicographic Decision Making: This approach involves ranking decision criteria in order of importance and making decisions based on the highest-ranking criterion that can be satisfied. This approach can be useful when decision makers have clear priorities and preferences.
- Satisficing: This approach involves choosing the first option that meets a minimum threshold of acceptability. It is often used when there are time constraints or when the decision maker is faced with a large number of options.
- A variety of Multiple-criteria decision-making strategies that explicitly evaluates multiple conflicting criteria in decision making.
Each of these approaches offers a different perspective on decision making and may be more appropriate in different contexts.
The Wikiversity course on Risk Management provides additional related materials.
- ChatGPT contributed to creating these materials.