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It’s a risk-adverse/ pessimistic attitude, whereby you expect to receive the most minimum contribution you can get out of a worst case scenario.
Sorry, John. You explain well in the lecture, but when I read past year answer, I am a little bit confused.
Pilot Paper Q1 answer”risk averse is to assume worst outcome, and seek to minimise the effect” My question is that why is it “Maxmin” but not “Minimin” outcome?
In this sentence, risk averse means the “minmax regret” or “maximin” ?
On the worst outcome, you would want to try maximise your minimum contribution. There is no such thing called ‘minimin’ because management wouldn’t want to try minimize a minimum contribution (even the words already sound strange, any manager saying this may get an axe for that).
Here’s to clarify –
Maximax for risk-seekers (best outcome)
Maximin for risk-adverse (worst-outcome)
Minimax for risk-neutral (using weighted probabilities)How about expected value? I thought expexted value is for risk-neutral using weighted average probabilities. Isn’t it right?
I like to think EV is the scientists/actuarial view.
It will never happen, but is almost certainly risk neutral based on the fact the decision is being made on a purely scientific basis.My apologies for the above post, it should be “Using probabilities to arrive at a weighted expected value” for the minimax approach.
The minimax approach simply means minimising the maximum regret for taking the wrong decision.
Let me put it in a simpler manner. We are not perfect forecasters – we cannot predict if tomorrow will be sunny or rainy. So we use probabilities to forecast whether for example, a positive outcome will likely happen at 60%, or a negative outcome will likely to be at 40%, and come up with an expected value.
Being a risk-neutral manager, I don’t care if it will be the best or the worst outcome I shall take, but I care about choosing a decision that does not bring me the worst possible opportunity cost for not taking a better decision. Thereby I will choose a decision with the least opportunity cost available.
I commented on a similar thread about expected value, you should take a look at it: https://opentuition.com/groups/p5-advanced-performance-management/forum/topic/ev/
In the mean time, get back towards revising Q1 Mackarel Defense Consulting (Dec 2012), and Q2 Franchising 4 U (June 2009), Q1 NW Entertainment Co (Dec 2003), Q1 Wonderland PLC (Dec 2006), and Q2 Equine Management Academy (June 2010).
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