ExpertEasy2 marksMultiple Choice
ACCA · Question 9 · Decision-making techniques
Section A
The management of DeepSea Drilling is evaluating three potential offshore sites. The CEO is highly risk-averse and wants to ensure the company avoids catastrophic losses, regardless of the potential upside.
Which decision-making rule under uncertainty should the CEO use?
Section A
The management of DeepSea Drilling is evaluating three potential offshore sites. The CEO is highly risk-averse and wants to ensure the company avoids catastrophic losses, regardless of the potential upside.
Which decision-making rule under uncertainty should the CEO use?
Answer options:
A.
Maximax
B.
Maximin
C.
Expected Value
D.
Minimax Regret
How to approach this question
Identify the risk profile of the decision-maker. Risk-averse = Maximin.
Full Answer
B.Maximin✓ Correct
The Maximin rule is used by risk-averse decision-makers. It involves identifying the worst possible outcome (minimum payoff) for each alternative and then selecting the alternative that offers the highest of these minimum payoffs (maximizing the minimum).
Common mistakes
Selecting Minimax Regret, which focuses on minimizing hindsight regret rather than strictly avoiding the worst absolute financial outcome.
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