Risk Management & Decision-Making Flashcards
7 cards from real CME practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Management & Decision-Making flashcards as text
Scenario planning as a risk tool is most valuable because it:
Answer: Forces decision-makers to consider multiple plausible futures simultaneously
Scenario planning helps organizations prepare for a range of possible futures by building narratives around distinct but plausible sets of conditions.
The risk of loss resulting from inadequate or failed internal processes, people, and systems is classified as:
Answer: Operational risk
Operational risk encompasses losses from breakdowns in internal processes, human error, system failures, or external events affecting day-to-day operations.
Which decision-making model assumes that managers have complete information and make fully rational choices to maximize utility?
Answer: Classical rational model
The classical rational model assumes perfect information, clearly defined objectives, and a logical process that always leads to the utility-maximizing choice.
A company sells its manufacturing plant located in a flood-prone area to reduce exposure. This is an example of:
Answer: Risk avoidance
Risk avoidance eliminates exposure entirely by exiting the activity, asset, or circumstance that creates the risk.
Prospect theory, developed by Kahneman and Tversky, suggests that people:
Answer: Are more sensitive to losses than to equivalent gains
Prospect theory demonstrates that losses loom larger than gains of equal size, causing loss aversion that often leads to suboptimal risk decisions.
During a merger, which risk category encompasses the possibility that the cultures of two organizations will not integrate successfully?
Answer: People and cultural risk
People and cultural risk in M&A refers to the danger that incompatible values, leadership styles, or workforce behaviors will undermine the deal's objectives.
Which principle states that in any complex system, roughly 80% of effects come from 20% of causes, guiding risk prioritization?
Answer: The Pareto principle
The Pareto principle (80/20 rule) suggests that a small number of risk sources typically account for the majority of potential losses, helping managers prioritize their risk management efforts.