Fundamental Rules
            • The farther in the future we must forecast, 
              the worse the forecast
            • The longer we have to do something the 
              cheaper it is to do it. 
            • Balance these two
               – Long plans mean bad forecasts
               – Short plans mean high operational costs
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                          Balancing Risk
            • News vendor problem
            • A single shot at a fashion market
            • Guess how much to order
               – If you order too much, you can only salvage the 
                 excess (perhaps at a loss) (s-c = net salvage value)
               – If you order too little, you lose the opportunity to sell 
                 (r = revenue)
            • Question: What value do you choose?
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                               The Idea
                 • Balance the risks
                 • Look at the last item
                     – What did it promise?
                     – What risk did it pose?
                 • If Promise is greater than the risk?
                 • If the Risk is greater than the promise?
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                Measuring Risk and Return 
           • Profit from the last item
              $p if the Outcome is greater,$0 otherwise 
           • Expected Profit
              $p*Probability Outcome is greater than our choice
           • Risk posed by last item
              $r if the Outcome is smaller, $0 otherwise
           • Expected Risk
              $r*Probability Outcome is smaller than our choice
           Example: r = Cost – Salvage Value
           What if r < 0? 
           What if Salvage Value > Cost?
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          Balancing Risk and Reward
           • Expected Profit
              $p*Probability Outcome is greater than 
                our choice
           • Expected Risk
              $r*Probability Outcome is smaller than 
                our choice
           • How are probabilities Related?
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