ExpertMedium2 marksMultiple Choice
ACCA · Question 15 · Decision-making techniques
Section A
A manager is deciding between three mutually exclusive projects (A, B, and C). The outcomes depend on the state of the economy. The manager decides to use the 'minimax regret' rule.
What is the underlying attitude to risk of a manager who uses the minimax regret rule?
Section A
A manager is deciding between three mutually exclusive projects (A, B, and C). The outcomes depend on the state of the economy. The manager decides to use the 'minimax regret' rule.
What is the underlying attitude to risk of a manager who uses the minimax regret rule?
Answer options:
A.
They are a risk seeker, looking to maximize the maximum possible return.
B.
They are risk-averse, looking to maximize the minimum possible return.
C.
They are risk-neutral, looking to maximize the expected value based on probabilities.
D.
They are concerned with making the wrong decision and want to minimize the maximum opportunity loss.
How to approach this question
Recall the definition of minimax regret. 'Regret' is the opportunity loss of not picking the best option for a given state of nature.
Full Answer
D.They are concerned with making the wrong decision and want to minimize the maximum opportunity loss.✓ Correct
The minimax regret rule aims to minimize the maximum regret (opportunity loss) that could occur from making a decision. It reflects a cautious approach where the decision-maker is concerned about the competitive disadvantage or 'regret' of making the wrong choice in hindsight.
Common mistakes
Confusing minimax regret with maximin (which focuses on worst-case absolute outcomes, not opportunity losses).
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