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Risk and Uncertainty

6.2 Maximin

The maximin rule involves selecting the alternative that maximises the
minimum payoff achievable.

 The investor would look at the worst possible outcome at each supply level,
then selects the highest one of these.

 The decision maker therefore chooses the outcome which is guaranteed to
minimise his losses. In the process, he loses out on the opportunity of making
big profits.

 This approach would be appropriate for a risk averse pessimist who seeks to
achieve the best results if the worst happens.

Example 4

A company is choosing which of three new products to make A, B or C It has
calculated likely pay-offs under three possible scenarios (I, II or III), giving the
following pay-off table:

Profit (loss) Product chosen
Scenario A B C

I 20 80 10
II 40 70 100

III 50 (10) 40

Using maximin, which product would be chosen?

Using maximin, a pessimist would consider the poorest possible outcome for
each product and would ensure that the maximum pay-off is achieved if the
worst result were to happen.

Therefore, product A would be chosen resulting in a minimum payoff of 20
compared to a minimum payoff of 10 for products and C.

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