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ACCA Applied Skills · Performance Management · Dealing with risk and uncertainty in decision-making

Using the same data, Bexley Co profits ($000) under Weak, Normal, Strong are: Project A: 40, 90, 120; Project B: 20, 100, 150; Project C: 60, 80, 110. Which project is chosen under the minimax regret rule, and what is its maximum regret?

Project A is chosen with a maximum regret of 30. Regret is the best payoff in each state minus the project's payoff. A's regrets are 20, 10 and 30, while B and C each have a maximum of 40, so A minimises the maximum regret.

  1. AProject A, maximum regret 30Correct
  2. BProject B, maximum regret 40
  3. CProject C, maximum regret 40
  4. DProject A, maximum regret 20

Explanation

Best per state: Weak 60, Normal 100, Strong 150. Regrets: A = 20, 10, 30 (max 30); B = 40, 0, 0 (max 40); C = 0, 20, 40 (max 40). The lowest maximum regret is A at 30. Choosing B or C wrongly ignores that their maximum regret is 40.

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