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IAI Actuarial Core Principles · Business Management · Decision-making process, attitude to risk and competition

A Mumbai-based insurer must choose between three product launches with uncertain demand. The management team is cautious and wants to guard against the worst outcome by selecting the option whose minimum possible payoff is highest. Which decision criterion is the team applying?

The team is applying the maximin criterion. It looks at the lowest payoff under each option and chooses the option whose lowest payoff is largest, which reflects a pessimistic, risk-averse attitude to uncertain demand.

  1. AMaximax
  2. BMaximinCorrect
  3. CMinimax regret
  4. DExpected monetary value
  5. Laplace (equal likelihood)

Explanation

Maximin identifies the worst payoff for each option and picks the option with the best of these. It reflects a risk-averse, pessimistic attitude. Maximax is optimistic, and minimax regret works on opportunity losses rather than payoffs.

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