Maxi-Min Decision Rule-decision rule for risk averse managers

As the name suggests, it is a pessimistic approach where by the decision maker selects the worse outcome in every condition given and out of the worse or minimum payoff selected the best of those worse results is picked.

Steps involved in this decision process;

Level one Decision: Prepare the payoff table

In this level, the payoff table portrays the net profit after we have considered selling price and relevant costs of a product

Level two Decision

In level two, we select the most worse performance in terms of payoff across the conditions given-i.e Min

This process of selecting involves moving down the columns, each at a time as per the factor under consideration.

Level three Decision

Select the best alternative amongst the worse/minimum outcome already selected in step two. This process of selecting involves moving across the row at the bottom line.

Example

The sales manager is looking up to select the best price his company can use to sell its products.

So the decision to be made will be determined by the best of the worse pay-off identified. Such that if given the following pay-off matrix;

Costs were as follows;

Variable cost $5

Salaries         $25,000

Required, using the maxi min decision rule, show the correct alternative.

Solution

Note that the worse/minimum option in each category of prices is payoffs of 55,000; 38,600 and 30,000. Out of this three alternatives, 55,000 is the highest worse or minimum outcome and hence it is the one selected as the maximum of the minimum