Question

Agree or Disagree and Why?

To assess whether or not a decision maker is a risk taker or risk avoider is completely relative to the context of the decision being made. For instance, if make an investment in a start up company, I am taking a risk because there is a large possibility that I may take a loss on my investment. On the other hand, I chose to take a different route to work because that is one safer than the one most traveled, then I am avoiding the risk of a wreck or injury. The three decision making without probabilities approaches outline in a our textbook are the Optimistic approach, Conservative Approach, and Minimax Regret Approach. As with the context of the decision to be made, each one of these has to fit the context in order to make sense. For instance, the optimistic approach places value on the highest payoff, conservative approach looks at worst payout, and minimax regret approach is where one would choose the decision alternative that minimizes the maximum state of regret that could occur over all possible states of nature.

Answer 1

I completely agree with the discussion in the paragraph. The Optimistic (Maxmin), Conservative (Minimax) and Minimax Regret are correctly defined. The aim of all these approach of decision making is different. The use of any approach depends on the context in which they are to be used. If the risk taking appetite is low, then conservative approach is okay to go ahead. If the risk taking appetite is high, Optimistic approach is best suited. Example: If the person is willing to make decision on investment and there are options like – Equity with return of 20% but high risk, Debt with return of 6% but with low risk and Hybrid with return of 12% and medium risk, the Optimistic person will mostly go for Equity and Conservative person will go for Debt. For Minimax regret, it will depend on actual value on return but mostly it will be Hybrid. So, basis the context and behavior, decision making criteria is changed.