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Financial Decision Making: Risk

Suppose your company's method of making decisions under risk is "making the best out of the worst possible outcome." What rule would you be forced to follow? Give an example and explain.

Solution Preview

This firm assumes that there is no probability distributions available or reliable enough for them so they use one of the methods that do not use probability in the decision:

• The Laplace Criterion: selection yielding the largest expected gain
• The Minimax criterion: most conservative criterion since it is based on making the best out of the worst ...

Solution Summary

The response defines Laplace , Minimax, Savage and Hurwicz and indicates which rule is followed and why. A reference is given.

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