How to calculate the Maximax, Maximin and EMV in Decision Analysis

Summary

This video discusses decision-making strategies in business, focusing on three methods: Maxi Max, Maxi Min, and Expected Monetary Value (EMV). The Maxi Max approach seeks the highest potential outcomes, advocating for building a new plant with a maximum payoff of $88 million. Conversely, the Maxi Min method considers worst-case scenarios, suggesting not to build the plant, as it only offers $16 million. Lastly, the EMV, which incorporates probabilities of various outcomes, also advises against building the plant, resulting in a $79 million expected value. These strategies highlight the importance of analyzing both potential gains and risks in decision-making.

Takeaways

• 😀 The maxi-max decision-making strategy focuses on identifying the best-case scenarios by selecting the maximum payoffs from each option.
• 😀 In the provided example, the highest potential profit from building a new plant is $88 million, leading to the decision to proceed with construction.
• 😀 The maxi-min strategy contrasts with maxi-max by focusing on the worst-case outcomes, choosing the maximum of the minimum payoffs.
• 😀 For the worst-case scenario, the maxi-min value is $16 million, indicating that not building the plant is the safest decision under poor conditions.
• 😀 The Expected Monetary Value (EMV) approach involves calculating a weighted average of payoffs based on associated probabilities for each outcome.
• 😀 Using probabilities, the EMV in this example amounts to $79 million, suggesting that the expected outcome favors not building the plant.
• 😀 The probabilities assigned to different demand levels are crucial for calculating EMV and assessing potential risks and rewards.
• 😀 The maxi-max strategy is more optimistic and may lead to riskier decisions, while the maxi-min strategy prioritizes safety and risk aversion.
• 😀 Decision-making in uncertain environments can benefit from a combination of strategies to evaluate potential outcomes thoroughly.
• 😀 Understanding these decision-making frameworks helps businesses make informed choices that balance potential profits against risks.

Q & A

What is the Maxi Max decision-making method?

The Maxi Max method focuses on identifying the best possible outcomes for each decision scenario by selecting the maximum value from each decision's outcomes and then choosing the largest among these maxima.

How is the Maxi Min method different from the Maxi Max method?

While Maxi Max looks at the best outcomes, the Maxi Min method considers the worst-case scenarios for each decision, selecting the minimum value from each decision's outcomes and then identifying the largest of these minima.

What does EMV stand for, and how is it calculated?

EMV stands for Expected Monetary Value. It is calculated by multiplying each possible outcome by its associated probability, summing these products, and selecting the maximum value.

In the plant-building scenario, what was the Maxi Max value and the associated decision?

The Maxi Max value was $88 million, and the associated decision was to build the plant.

What was the outcome of the Maxi Min analysis in the transcript?

The Maxi Min value was $16 million, and the decision associated with this analysis was to not build the plant.

What EMV value was determined in the example, and what decision did it suggest?

The EMV value was $79 million, and it suggested not to build the plant.

What type of scenarios does the Maxi Max method emphasize?

The Maxi Max method emphasizes optimistic or best-case scenarios, focusing on the highest potential payoffs.

Why might a decision-maker choose the Maxi Min method?

A decision-maker might choose the Maxi Min method to mitigate risks by ensuring the best possible outcome in the worst-case scenario, thus avoiding significant losses.

What was the probability of having a demand of 1 million metric tons over ten years?

The probability of having a demand of 1 million metric tons over ten years was 5%.

How can the results from Maxi Max, Maxi Min, and EMV aid in decision-making?

These results provide a comprehensive view of potential outcomes, allowing decision-makers to weigh risks and rewards effectively, and make informed choices based on different strategies.