1. The eight Trustees of a charity, Food Aid (FA), currently make collective decisions as a Board, regarding FA’s strategic direction.
(a) Explain the advantages of developing a group utility function for the Trustees.
[20 marks]
(b) Outline the process which could be employed to construct such a utility function.
[25 Marks]
FA are currently contemplating the development of new fund raising initiatives and they have identified a number of professional fund raising companies (PFRC) they could employ to assist in this process. The Trustees believe that the funds they will raise over the next three years will depend upon the PFRC they employ and various factors associated with the level of economic activity in the country. The maximum and minimum funds they contemplate they will be able to raise as a result of choosing one of these PFRCs ranges from $0m to $10m. The Board of Trustees’ utility(U) function for this decision is estimated to be:
for 0 funds < $4m
for 4 funds < $6m
For funds between $6m and $10m the utility function is less clearly defined, but
U($6m) = 0.75, U($7m) = 0.9, U($8m) = 0.95 and U($10m) = 1.
(c) Determine the Trustee Board’s attitude to risk for the three funding categories ($0-$3.99m, $4-$5.99m, $6- 10m) and explain how you have made this judgement.
[25 marks]
The Trustee Board narrows the choice of PFRCs to two: A and B. The potential funding profiles arising from employing A or B are estimated to be as follows:
PFRC A PFRC B
Funds($m) Probability Funds($m) Probability
2 0.2 0 0.3
4 0.6 8 0.6
6 0.2 10 0.1
(d) Determine which PFRC the charity should partner and outline any factors which FA should consider before choosing this option.
[30 marks]
2. Describe three of the common heuristics which individuals employ when making decisions, the extent to which these can bias judgements and the degree to which prospect theory captures their effects in explaining individuals’ behaviour.
[100 marks]
3. A solar panel manufacturing organisation, Daniel Sun (DS), is attempting to compare the merits of 7 alternative expansion strategies (A-G):
(a) What data would DS need in order to construct a risk/return diagram to compare options A-G? Discuss the value of employing a risk/return diagram when making choices between competing strategies.
[30 marks]
(b) Outline how DS might employ the risk adjusted statistic (Markowitz criterion) to help select the most appropriate strategy and discuss the advantages it might offer over the expected monetary value technique.
[35 marks]
(c) Explain how a decision tree might be employed to assist in such a decision making process and outline the benefits such an approach might offer.
[35 marks]
4. Fei Fei (FF) plc is planning to buy one of its rivals, W, X Y or Z. It would cost FF a similar amount to purchase any one of these companies. It is estimated by FF’s economist that should FF purchase one of these rivals then FF’s profits (£m) over the next two years will depend upon the rival they purchase and the level of interest rates in the economy over this period as follows:
● If W is purchased and interest rates are low, medium or high then FF’s profits (£m) will be 10, 2 and -2 respectively.
● If X is purchased and interest rates are low, medium or high then FF’s profits (£m) will be 5, 4 and 1 respectively.
● If Y is purchased and interest rates are low, medium or high then FF’s profits (£m) will be 3, 6 and 0 respectively.
● If Z is purchased and interest rates are low, medium or high then FF’s profits (£m) will be 2, 2 and 6 respectively.
● If none of these rivals is purchased and interest rates are low, medium or high then FF’s profits (£m) will be 4, 4 and 1, respectively.
(a) Explain to what extent the information given above may be inadequate for making a rational decision.
[20 marks]
(b) In the absence of further information, determine which strategy FF should adopt if they employed the maximax, maximin, coefficient of optimism, regret and insufficient reason criteria.
[35 marks]
(c) Discuss the advantages and disadvantages of each of the decision making under uncertainty criteria employed in (4 b).
[25 marks]
(d) Outline the advantages of summarising information in the form of a payoff matrix when attempting to make rational strategic decisions.
[20 marks]
TURN OVER
5. Jonty Jones Estates (J) are negotiating with Milky Meadows Land (M) to acquire a new site on which they intend to build some luxury apartments. M’s strategies differ in terms of the degree of control they retain over the site and hence the future income they will receive in rent. J’s strategies differ in terms of the amount of cash they are prepared to pay immediately and the amount which they make dependent on future letting fees. J and M both have three possible negotiating strategies and they both realise that the ultimate profit (£ m) they both make from the deal depends upon the strategy employed by both J and M as follows:
M’s Strategy
J1 M1
(2,6) M2
(6,9) M3
(1,5)
J’s J2 (6,4) (5,5) (1,3)
Strategy J3 (5,1) (7,1) (2,2)
(If J employs J1 and M employs M1 then J expects their profits over the next 5 years to increase by £2m and M expects its own profits to increase by £6m)
It might be argued that (J1, M2) is the optimal outcome to these negotiations as the combined profit to both companies is greatest.
(a) (i) Discuss why this solution is unlikely to be achieved.
(ii) Identify the likely outcome of these negotiations and explain how you arrived at this conclusion and.
(iii) Explain why the likely outcome of these negotiations might be termed a ‘stable’ outcome.
[40 marks]
MANG6134W1
(b) Discuss how each of the following practices may help J and M achieve the (J1, M2) solution:
(i) Communication
(ii) Initial trust
(iii) Sanctions and policing
(iv) Negotiating with each other an indefinite number of times
(v) Enhancing the value of reputation
(vi) Increasing the focus on long run objectives.
[40 marks]
(c) Describe a ‘tit for tat’ strategy and explain why this may prove to be optimal if negotiating with a variety of different opponents.
[20 marks]
6. (a) Discuss the relative strengths and weaknesses of using:
(i) Individuals for making subjective probability judgements
(ii) Selected groups of experts for making subjective probability judgements.
[50 marks]
(b) Discuss the benefits of employing more sophisticated techniques than ‘direct questioning’ for eliciting subjective probability judgments.
[50 marks]
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