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ACCA Strategic Professional · Strategic Business Leader · Financial analysis and decision-making techniques

Zorlu Components is choosing between three product launches. The board has no reliable way to estimate the probability of each market outcome, and the directors are cautious and want to avoid the worst possible result. Which decision criterion best fits this approach, and what does it imply?

Maximin fits. Because probabilities cannot be estimated and the directors are cautious, they should compare the worst payoff of each launch and choose the launch whose worst outcome is best. This protects against the worst result, unlike maximax, which is optimistic, or expected value, which requires probabilities.

  1. AMaximin: choose the option whose worst possible payoff is the highestCorrect
  2. BMaximax: choose the option with the highest possible payoff in the best outcome
  3. CExpected value: choose the option with the highest probability-weighted payoff
  4. DMinimax regret: choose the option with the highest best-case payoff

Explanation

Maximin suits risk-averse decision makers when probabilities are unknown, because it ranks options by their worst payoff and picks the best of those. Maximax is the optimist's rule. Expected value needs probabilities, which are not available here. Minimax regret minimises the largest opportunity loss, not best-case payoff.

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