ACCA Performance Management (F5) Certification Practice Exam

What does the maximin rule focus on in decision-making?

1. Maximizing the total possible profit

2. Minimizing the chances of regret

3. Selecting the alternative that maximizes the minimum pay-off

4. Maximizing the probability of success

The correct answer is: Selecting the alternative that maximizes the minimum pay-off

The maximin rule is a decision-making strategy used in scenarios involving uncertainty, particularly in the field of economics and decision theory. This rule focuses on selecting the alternative that maximizes the minimum pay-off. The underlying logic is to safeguard against the worst-case scenario; decision-makers prioritize their options based on the best outcome they can secure when the outcome is at its lowest. For example, if a decision-maker is faced with several alternatives, the maximin approach involves evaluating the worst possible outcome of each alternative and choosing the one that has the highest minimum pay-off. This approach is particularly useful in situations where a decision-maker wants to avoid significant losses and is risk-averse. In contrast, other approaches such as maximizing total profit or maximizing the probability of success do not inherently account for worst-case outcomes and can lead to decision-making that carries greater risk. The maximin rule stands out for its focus on minimizing regret by ensuring that the chosen alternative is robust enough to withstand unfavorable conditions.