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

A manager facing uncertainty with no probability estimates chooses the alternative whose worst possible payoff is the best among all alternatives' worst payoffs. This reflects which criterion?

This is the maximin, or pessimistic, criterion. The manager finds the worst payoff of every alternative and then chooses the alternative whose worst payoff is highest. It is a conservative approach used under uncertainty when probabilities are unknown, unlike maximax, which focuses on the best outcomes.

  1. AMaximax (optimistic)
  2. BLaplace (equal probability)
  3. CMaximin (pessimistic)Correct
  4. DHurwicz with coefficient of optimism 1

Explanation

Maximin identifies the minimum payoff of each alternative and selects the one with the largest of these minimums, a cautious approach. Maximax picks the best of the best payoffs. Laplace averages payoffs assuming equal probabilities. Hurwicz with an optimism coefficient of 1 reduces to maximax.

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