ACCA Performance Management (F5) Certification Practice Exam

Which decision-making rule involves selecting the alternative that maximizes the maximum pay-off?

1. Minimax rule

2. Maximax rule

3. Maximin rule

4. Minimized regret rule

The correct answer is: Maximax rule

The decision-making rule that involves selecting the alternative that maximizes the maximum pay-off is known as the maximax rule. This approach is used in situations characterized by uncertainty, where decision-makers are optimistic about the potential outcomes. Under the maximax rule, the focus is on identifying the alternative that offers the highest possible return, assuming the best-case scenario for each option. In practical terms, when applying the maximax rule, a decision-maker would evaluate all possible outcomes of each alternative and choose the one that has the greatest maximum payoff. This reflects a risk-tolerant or even risk-seeking attitude, as it emphasizes achieving the highest reward rather than considering potential losses. This rule contrasts with other decision-making approaches that focus on different aspects of outcomes. For example, the maximin rule focuses on maximizing the minimum payoff, which is typically associated with a more conservative approach. The minimax rule, on the other hand, is about minimizing the maximum loss, and the minimized regret rule involves choosing options that reduce the potential for regret from poor outcomes. Each of these alternatives serves different decision-making strategies based on risk preferences, but the maximax rule distinctly emphasizes the pursuit of maximum rewards in uncertain scenarios.