RISK ASSESSMENT DEPT. OF AGROINDUSTRIAL TECHNOLOGY FACULTY OF AGRICULTURAL TECHNOLOGY UNIVERSITAS BRAWIJAYA

RISK ASSESSMENT DEPT. OF AGROINDUSTRIAL TECHNOLOGY FACULTY OF AGRICULTURAL TECHNOLOGY UNIVERSITAS BRAWIJAYA

RISK ASSESSMENT To determine relative priority and get information to solve it Risk that should be assessed/measured: Dimension (frequency, number of lossess) Determine how serious if the risk happens be carefull with the effect of risk Risk assessment by probability distribution EOL, EVPI, EPV

RISK ASSESSMENT METHODS 1. EOL (Expected Opportunity Loss) A number of loss pay off because we dont choose the alternative action priciple: minimize losses because we choose a specific alternative Rationally, we choose the smallest EOL value to avoid the dissatisfaction/regret in the future

EXAMPLE OF EOL An entrepreneur wanna invest his money to one of this business alternatives: shrimp ponds, food stalls and music studios, with consideration of good economic growth rate (probability 0.4) and bad (0.6). Data seen in Table, what is the best decision for the entrepreneur based on EOL????

FIRST TABLE OF EXPECTED OPPORTUNITY LOSS Business Alternative Economic Growth rate Good (0,4) Bad (0,6) Shrimp ponds 50.000 10.000 Food stalls 20.000 60.000 Music studio 100.000 50.000

FIRST TABLE OF EXPECTED OPPORTUNITY LOSS Business Alternative Economic Growth rate Good (0,4) Bad (0,6) Shrimp ponds 50.000 10.000 Food stalls 20.000 60.000 Music studio 100.000 50.000

PAY OFF TABLE (COMPARED WITH EVERY BUSINESS ALTERNATIVES) BIGGEST VALUE: OPPORTUNITY LOSS Business Alternative Economic growth rate Good (0,4) Bad (0,6) Shrimp ponds 50.000 50.000 Food stalls 80.000 0 Music studio 0 10.000

EOL CALCULATION EOL (Shrimp ponds) = 50.000(0,4) + 50.000(0,6) = 50.000 EOL (food stalls) = 80.000(0,4) + 0(0,6) = 32.000 EOL (music studio) = 0(0,4) + 10.000(0,6) = 6.000 *** The chosen business with the smallest opportunity loss is Music Studio with EOL min = 6.000

CHOOSE THE BEST BUSINESS ALTERNATIVES WITH EOL? Business alternatives Apples beverages Apple Jenang Economic conditions quiet Normal crowd (0,10) (0,7) (0,2) 25.000 400.000 650.000 10.000 440.000 740.000 Apple chips 125.000 400.000 750.000

PAY OFF TABLE Business alternatives quiet (0,10) Economic conditions normal (0,70) crowd (0,2) Apples beverages Apple Jenang 100.000 40.000 100.000 115.000 0 10.000 Apple chips 0 40.000 0

EOL (AB) =100.000(0,1)+40.000(0,7)+100.000(0,2) = 58.000 EOL (AJ) =115.000(0,1)+0+10.000(0,2) = 13.500** (CHOOSEN) EOL (AC) = 0 (O,1)+40.000(0,7)+0 (0,2) = 28.000

EVPI METHOD (EXPECTED VALUE PERFECT INFORMATION) It is a difference between the perfect information and the minimum risks (EOL) As the maximum amount paid for obtaining the perfect information (equal to the minimum EOL) EVPI = EV (Perfect) - EV (min risk) The decision determines the EV (Perfect) depending on the type of actor: RISK TAKER (max) and RISK AVOIDER (min)

EXAMPLE OF EVPI Business alt Economic growth Good (0,4) Bad (0,6) Shrimp ponds 50.000 10.000 Food stalls 20.000 60.000 Music Studio** 100.000 50.000 Based on choosen business alternative (music studio), the EVPI = EV(perfect) biggest value from the first table EV(PERFECT) = 100.000(0,4) + 60.000(0,6) = 40.000 + 36.000 = 76.000 EV(min) choosed based on EOL min (in this case = music studio) EV (min) = 100.000(0,4) + 50.000(0,6) = 40.000 + 30.000 = 70.000 EVPI = EV(S) EV(min) = EOL min = 76.000 70.000 = 6.000

Determine the value of EVPI based on business alternatives (apple beverage, apple jenang and apple chips) selected...????? Condition business quiet Normal crowd (0,10) (0,7) (0,2) Apple beverages 25.000 400.000 650.000 Apple jenang 10.000 440.000 740.000 Apple chips 125.000 400.000 750.000

EVPI EV (perfect) =125.000(0,1)+440.000(0,7)+750.000(0,2) = 12.500+308.000+150.000 =470.500 EV (choosen based on EOL min) = 10.000(0,1)+440.000(0,7)+740.000(0,2) = 457.000 EVPI = EV (perfect) EV(min) = 470.500 457.000 = 13.500 = EOL min

UNCERTAINTY THEORY The probability of a result is not known for certain (only by estimate) Decision-makers do not have complete information The thing to be decided has never happened Anticipate conditions of uncertainty: 1. looking for more information 2. through research 3. the use of subjective probabilities

DECISION-MAKING METHOD OF UNCERTAINTY CONDITIONS There are 5 criterias: 1. Laplace (Bayesian) 2. Maximin Wald 3. Maximax 4. Hurwics 5. Minimax Savage/ Regret

LAPLACE (BAYESIAN) The approach gives the SAME value for each event/condition Similar with EQUAL LIKELIHOOD criteria Assumptions: the decision maker determines the same probability of each occurrence/condition Selected result: HIGHEST weight

LAPLACE Business alt Economic growth Good (0,5) Bad (0,5) Result Shrimp ponds 50.000 10.000 50.000(0,5)+10.000(0.5) = 30.000 Food stalls 20.000 60.000 20.000(0,5)+60.000(0,5) = 40.000 Music Studio** 100.000 50.000 100.000(0.5)+50.000(0.5) = 75.000 ***

MAXIMIN WALD A pessimistic view (RISK AVOIDER) that avoids the risk of future results The hope is the CREDIT VALUE for the alternative chosen actions How to: compare MINIMUM and MAXIMUM Payoffs to get the most MINIMUM value selected

MAXIMIN WALD Business alt Economic growth result good bad Min Max Shrimp ponds 50.000 10.000 10.000 Food stalls 20.000 60.000 20.000 Music Studio** 100.000 50.000 50.000***

MAXIMAX Contrary to Maximin's criteria Optimistic view (RISK TAKER), aggressive attitude with the greatest results to be achieved MAXIMIN and MAXIMAX Criteria is unrealistic for the real business world because of the PARSIAL assessment

MAXIMAX Business alt Economic growth Result good Bad Max Max Shrimp ponds 50.000 10.000 50.000 Food stalls 20.000 60.000 60.000 Music Studio** 100.000 50.000 100.000 ***

HURWICS Criteria result of Maximin and Maximax compromise Rarely as Risk Taker and Avoider are perfect The coefficient of Optimism (α) and pessimism (1-α) Pay off weighted = α (pay off maximum) + (1- α) (pay off minimum) Best alternative = BIGGEST value

HURWICS Economic growth Business alt Maximax Maximin Result (0,6) (0,4) Shrimp ponds 50.000 10.000 Food stalls 60.000 20.000 Music Studio** 100.000 50.000 50.000(0,6)+10.000(0,4) = 30.000+4.000 = 34.000 60.000(0,6)+20.000(0,4) = 36.000+8.000=44.000 100.000(0,6)+50.000(0,4) =60.000+20.000=80.000*

MINIMAX REGRET Based on Opportunity Loss Incidental Current/UNFORTUNATE EVENT CRITERION (comparing between income with specific action and highest expected income)

MINIMAX REGRET Business alt Economic growth Opp.Loss (between each business alt) good bad good Bad Result (max -> min) Shrimp ponds 50.000 10.000 50.000 50.000 50.000 Food stalls 20.000 60.000 80.000 0 80.000 Music Studio** 100.000 50.000 0 10.000 10.000*

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