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

Which statement about the minimax regret rule is correct?

Minimax regret selects the option whose largest opportunity loss is smallest. Regret is the shortfall from the best choice in each state of the world. It does not use probabilities, unlike expected value, and differs from maximin and maximax, which use payoffs directly.

  1. AIt selects the option with the highest expected profit
  2. BIt selects the option with the lowest possible opportunity loss in the worst caseCorrect
  3. CIt selects the option with the highest best-case payoff
  4. DIt selects the option with the highest worst-case payoff

Explanation

Minimax regret calculates, for each state, the difference between the best possible payoff and the payoff achieved, then picks the option whose largest regret is smallest. Highest best-case is maximax and highest worst-case is maximin. Expected profit needs probabilities, which this rule does not use.

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