Dan Hein owns the mineral and drilling rights to a 1,000 hectare tract of land.If he drills a well and does not strike oil his net loss will be $500,000, but if he drills a well and strikes oil his net gain will be $1,000,000.If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $10,000.The probability of the state of nature "oil in the tract" is unknown.If Dan is a pessimist, he would choose the ___.
A)maximin criterion
B)maximax criterion
C)Hurwicz criterion
D)minimax regret strategy
E)maximin regret strategy

Question

Quizplus · Accepted Answer

If Dan is a pessimist, he would be most concerned about the worst-case scenario, which is drilling a well and not striking oil. Therefore, he should choose the maximin criterion, which maximizes the minimum possible outcome. In this case, the minimum possible outcome is a net loss of $500,000, so Dan should not drill and avoid the $10,000 cost of the mineral and drilling rights. Choosing the maximin criterion is conservative and risk-averse, which is appropriate for a pessimistic decision-maker.

Dan Hein Owns the Mineral and Drilling Rights to a 1,000