Cowie Asset Management (CAM) is a property developer that is looking to develop the
mainland south area of Halifax. CAM has several projects under consideration, of which it
wishes to select one for immediate development.
The profitability of each depends upon the
amount of economic growth that occurs over the next 5 years. The government has
prepared three growth forecasts, with associated probabilities, and CAM has estimated the
profitability of each project for each growth scenario, as follows:
What decision should be made according to the maximax decision rule?
The optimist chooses the project that has the highest possible return (i.e., “Row Max” shows the
maximum profit for each project… choose the project with the maximum of these maximums)
Select Project D with a maximum profit of $1,000,000
What decision should be made according to the maximin decision rule?
The pessimist looks for the worst to happen regardless of which project is picked.
project that has the highest return assuming the worst happens, i.e. among “Row Min” values…
find the minimum profit for each project and then choose the project with the maximum of these
Select Project C with a minimum profit of $300,000
What decision should be made according to the minimax regret decision rule?
Regret = max profit – project profit for that state of nature