payoff table

Question 1

what decision rule will be used if an individual is a risk seeker

Answer 1

maximax which means the best outcome off the best contribution

Question 2

how to calc ev

Answer 2

cash flow x probability

Question 3

what decision rule will be used of an individual is risk averse

Answer 3

maximin which means the best outcome of the worst contribution

Question 4

what decision rule will be used if an individual is risk neutral

Answer 4

the highest total expected value will be selected

Question 5

what is the use of selecting mini max

Answer 5

the minimax regret strategy minimizes the maximum regret. useful for a rick averse decision maker who is a ‘sore loser’ and does not want to make the wrong decision

regret is defined as opportunity cost of making the wring decision

Question 6

what are the problems with using expected value

Answer 6

1. highly dependent on the accuracy of the data gathered for forecasts.
2. using historical data for percentages are sometimes way off e.g covid