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Global Strategy and Leadership · Module 5: Strategy development

Four Rules, Four Answers

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Chapters

  1. 0:00Question
  2. 0:23Breakdown
  3. 1:01Rule

In short

Without probabilities, the choice depends on the decision rule. Maximin picks the best worst case, maximax the best best case, and minimax regret the option whose largest regret is smallest. In the plant question each rule picks a different option, so read which rule the question asks for.

  • Regret = best payoff in that scenario minus this option's payoff.
  • Take each option's largest regret, then choose the smallest.
  • The wrong answers are right answers to other rules.

Transcript

0:00Question

Every wrong answer here is right, under a different rule. Tawny Cement must pick one of four plants. Demand could be low, medium or high. Nobody can put probabilities on it, so the board uses minimax regret. Which plant does it choose? Pick one.

0:23Breakdown

Regret is what you lose by not picking the best plant for what happens. In each demand column, take the best profit and subtract every other plant's. Then find each plant's biggest regret: 9, 5, 7 and 6. Choose the plant whose worst regret is smallest: medium, at 5. Small has the best worst case. That's maximin, not regret. Cross out A. Large has the best best case. That's maximax. Cross out C. Leased has the best average. That's another rule again. Cross out D. Medium plant: B.

1:01Rule

Build the regret table. Take each row's largest, then the smallest of those. Maximin, maximax, averages: use the rule the question names. Want more traps like this? Follow for the next one.

Try a question on this lesson

From the EstatePass Global Strategy and Leadership bank. Answer it, then read the explanation.

Question 1 of 10/0 correct

Tawny Cement Ltd must choose one of four plant options. Forecast profit in $ million under low, medium and high demand is: small plant 4, 5, 5; medium plant 1, 8, 9; large plant -3, 6, 14; leased plant -2, 8, 13. No probabilities can be estimated. The board decides to use the minimax regret rule. Which option does it choose?

Sources

  • Decision making under uncertainty (maximin, maximax, minimax regret)
  • CPA question bank: cpa-gsl-0438

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