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

A manager of a Pune-based firm must choose among three projects without any reliable estimate of the probabilities of future market conditions. She selects the project whose worst possible payoff is the best among the worst payoffs of all projects. Which decision criterion is she applying?

She is applying the maximin criterion. It identifies the worst payoff of each alternative and then selects the alternative with the highest of these minimums, which reflects a cautious, pessimistic approach to decisions under uncertainty when probabilities of future conditions are not known.

  1. AMaximax criterion
  2. BMaximin criterionCorrect
  3. CMinimax regret criterion
  4. DExpected monetary value criterion

Explanation

Choosing the alternative whose minimum payoff is the highest is the maximin (Wald) criterion, used by pessimistic decision makers under uncertainty. Maximax would pick the best of the best payoffs. Minimax regret works on regret values rather than raw payoffs. EMV needs probabilities, which are unavailable here.

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