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ACCA Applied Skills · Performance Management · Dealing with risk and uncertainty in decision-making

Which of the following is a recognised limitation of using expected values to make a decision about a one-off project?

A key limitation is that the expected value is a weighted average that may never actually occur in a one-off decision, and it says nothing about the spread of outcomes or risk. It is also risk-neutral, so it ignores the decision-maker's attitude to risk.

  1. AThe expected value is an outcome that may never actually occur, so it gives no indication of the spread of possible resultsCorrect
  2. BExpected values cannot be calculated where probabilities are estimated subjectively
  3. CExpected values always lead to a risk-seeking decision
  4. DExpected values can only be used for projects with exactly two outcomes

Explanation

An expected value is a long-run average; for a one-off decision the result may be a figure that never happens, and it ignores variability and the decision-maker's attitude to risk. The other statements are false: subjective probabilities can be used, EV is risk-neutral rather than risk-seeking, and any number of outcomes may be used.

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