Question

True or False:

(1) Risk can be quantified, estimated, and hedged. Uncertainty cannot. Don’t mistake risk for uncertainty, and try to design institutions flexible enough to deal with unforeseen contingencies. (I believe the answer is TRUE).

(2) When customers have unknown values, you face a familiar trade-off: price high and sell only to all customers, or price low and sell to all customers. (I am not sure about this one for the wording. I think the answer is TRUE as well).

Answer 1

1. The answer is True

Since we can never eliminate uncertainty we must learn to fight despite it. We can do this by developing simple flexible plans. Planning for contingencies , developing standard operating procedures and fostering initiative among subordinates.

In case of risk all possible future events or consequences of an action or decision are known. However, the events that will actually materialise are unknown beforehand. In case of risk the probability calculus is applicable and provides a sound basis for risk management, cost/benefit analysis, budget planning, etc.

2. The answer is True

When you’re uncertain about the costs or benefits of a decision, assign a simple probability distribution to the variable and compute expected costs and benefits.

When customers have unknown values, you face a familiar trade-off: Price high and sell only to high-value customers, or price low and sell to all customers.

If you can identify high-value and low-value customers, you can price discriminate and avoid the trade-off. To avoid being discriminated against, high-value customers will try to mimic the behavior and appearance of low-value customers.