Exhibit 14.5
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%.
-Which decision rule pessimistically assumes that nature will always be "against us" regardless of what decision we make?
A) maximax decision rule.
B) maximin decision rule.
C) minimax regret decision rule.
D) minimin decision rule.

Question

Exhibit 14.5
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%. 
-Which decision rule pessimistically assumes that nature will always be "against us" regardless of what decision we make?
A) maximax decision rule. 
B) maximin decision rule. 
C) minimax regret decision rule. 
D) minimin decision rule.

Quizplus · Accepted Answer

The maximin decision rule assumes that nature will be "against us" and selects the decision with the highest minimum payoff. In this case, the maximum minimum payoff is investment B with a payoff of $30,000. Therefore, the best choice according to the maximin decision rule is to invest in option B.

Exhibit 14.5 The Following Questions Are Based on the Information Below