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Maximin decision rule

Although Ken Brown (discussed in problem 3-16) is the principal owner of Brown Oil, his brother Bob is credited with making the company a financial success. Bob is vice president of finance. Bob attributes his success to his pessimistic attitude about business and the oil industry. Given the information in problem 3-16, it is likely that Bob will arrive at a different decision. What decision criterion should Bob use, and what alternative will he select?

See below for the info from 3-16

Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his university teaching job, Ken has been able to increase his annual salary by a factor of over 100. At the present time, Ken is forced to consider purchasing some more equipment for Brown Oil because of competition. His alternatives are shown in the following table:

Equipment Favorable Market Unfavorable Market
Sub 100 300,000 (200,000)
Oiler J 250,000 (100,000)
Texan 75,000 (18,000)

For example, if Ken purchases a sub 100 and if there is a favorable market, hje will realize a profit of 300,000. On the other hand, if the market is unfavorable, Ken will suffer a loss of 200,000. But Ken has a always been a very optimistic decision maker.

Solution Preview

A pessimistic decision maker like Ken Brown will use the Maximin decision rule to make a conservative decision. Under this, he would be considering the worst ...

Solution Summary

The Maximin decision rule is contextualized.

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