ACCA Performance Management (F5) Certification Practice Exam

What does the minimax regret rule aim to accomplish?

1. Maximize the gains from decision-making

2. Minimize the risks of the most favorable decision

3. Minimize the maximum regret

4. Maximize the average outcomes

The correct answer is: Minimize the maximum regret

The minimax regret rule is a decision-making criterion used primarily under conditions of uncertainty. Its primary aim is to minimize the maximum possible regret that a decision-maker might experience as a result of making a particular choice. Regret is defined as the difference between the payoff from the best decision that could have been made and the payoff from the decision that was actually made. By focusing on minimizing the worst-case scenario (the maximum regret), this approach encourages decision-makers to consider potential outcomes and choose options that avoid incurring high levels of regret. This is particularly useful in situations where the outcomes are uncertain and the probabilities associated with them are not known. While other options might imply elements of decision-making processes, none capture the essence of the minimax regret rule as effectively as minimizing maximum regret. This is what distinguishes the rule and makes it a sound strategy in uncertain situations, aiming to reduce the psychological discomfort that may arise from realizing that a better choice was available after the fact.