Some decision makers prefer decisions with low risk, but this depends on how risk is measured. As we mentioned in this section, variance (see the definition in problem 1) is one measure of risk, but it includes both upside and downside risk. That is, an outcome with a large positive payoff contributes to variance, but this type of "risk" is good. Consider a decision with some possible payoffs and some possible costs, with given probabilities. How might you develop a measure of downside risk for such a decision? With your downside measure of risk, which decision in Figure 6.1 do you prefer, decision 1 or decision 2? (There is no single correct answer.)

1 Decision 1 Decision 2 Decision 3 2 Payoff/Cost Probability 0.1 0.2 0.7 Payoff/Cost Probability 0.6 Payoff/Cost Probability $50,000 $10,000 -$5,000 $5,000 -$1,000 $3,000 0.4 3,500 EMV 2,600 EMV 3,000