Decision Making Under Risk: Questions and Answers Guide
Justyna Wachulka-Chan
- March 24, 2026
- 2 minutes read
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Risk vs. Uncertainty
Risk: A situation where outcomes can be quantified.
Uncertainty: Future outcomes are unknown and cannot be assigned probabilities.
Probabilities & Expected Values
Expected Value (EV): A weighted average of possible outcomes, useful for decision-making.
Standard Deviation: Measures volatility and risk in predictions.
Coefficient of Variation: Used for comparing risks across different datasets.
Decision-Making Strategies
Risk-Seeker: Chooses strategies with the highest possible outcomes.
Risk-Neutral: Uses expected value as a decision criterion.
Risk-Averse: Prioritizes avoiding risk, using maximin or minimax regret approaches.
Decision Tools
Pay-off Tables: Displays all possible profits or losses from decisions.
Decision Trees: Diagrammatically represent decision problems with probabilities.
Sensitivity Analysis: Examines how much a variable must change before a decision is reversed.
Strengths & Weaknesses of Decision Methods
Expected Value
✅ Simple to calculate, accounts for risk
❌ Can be subjective, ignores range of possible outcomes
Sensitivity Analysis
✅ Identifies critical variables, helps decision-makers focus
❌ Does not account for the probability of changes occurring
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About the Author
Justyna Wachulka-Chan
Justyna Wachulka-Chan is a CIMA-qualified finance professional with over 20 years of experience in accounting and finance, including roles at KPMG. She founded Practice Tests Academy in 2016, helping 35,000+ CIMA and ACCA students pass their exams through structured practice questions and mock exam resources.
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