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CMA Foundation · Fundamentals of Business Economics and Management · Decision-making - Types and Process

A firm lists several alternatives, assigns each a probability for every possible state of nature, and picks the alternative with the highest weighted average payoff. This decision-making technique is best described as:

The technique is the expected monetary value criterion. Each payoff is weighted by the probability of its state of nature, the weighted values are summed for each alternative, and the alternative with the highest expected value is selected. Maximin and minimax regret do not use probabilities.

  1. AExpected monetary value (EMV) criterionCorrect
  2. BMaximin criterion
  3. CMinimax regret criterion
  4. DBrainstorming

Explanation

EMV multiplies each payoff by the probability of its state of nature and sums the results; the alternative with the highest total is chosen. Maximin ignores probabilities and looks only at the worst outcome of each alternative. Minimax regret works on opportunity loss, not weighted payoffs.

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