How do EMV and the maximax criterion differ in decision making under uncertainty?

How do EMV and the maximax criterion differ in decision making under uncertainty?

• A. Maximax selects the best possible payoff without considering probabilities; EMV uses probabilities and averages
• B. EMV uses probabilities and averages; maximax ignores probabilities
• C. EMV considers probabilities and averages; maximax searches only the best possible payoff
• D. EMV and maximax always yield the same choice

Answer: (A)

Decision making under uncertainty often treats outcomes and their likelihoods differently. The maximax rule is optimistic: for each option you only look at the best possible payoff across all states, and then pick the option with the highest such best payoff. It disregards how likely that best outcome is, so probabilities don’t enter the calculation. The EMV (expected monetary value) criterion, on the other hand, uses the probabilities of the different states of the world. It multiplies each possible payoff by the probability of that state and sums them, giving a weighted average that reflects both outcomes and how likely they are. For example, if two states are equally likely, one option pays 90 in the favorable state and 0 otherwise, and another pays 70 in the favorable state and 60 in the unfavorable state, maximax would pick the first option (highest of the maxima is 90). EMV would compute 0.5×90 + 0.5×0 = 45 for the first option and 0.5×70 + 0.5×60 = 65 for the second, so EMV would pick the second. This shows the difference: maximax ignores probabilities, while EMV uses probability-weighted averages.

Decision making under uncertainty often treats outcomes and their likelihoods differently. The maximax rule is optimistic: for each option you only look at the best possible payoff across all states, and then pick the option with the highest such best payoff. It disregards how likely that best outcome is, so probabilities don’t enter the calculation.

The EMV (expected monetary value) criterion, on the other hand, uses the probabilities of the different states of the world. It multiplies each possible payoff by the probability of that state and sums them, giving a weighted average that reflects both outcomes and how likely they are.

For example, if two states are equally likely, one option pays 90 in the favorable state and 0 otherwise, and another pays 70 in the favorable state and 60 in the unfavorable state, maximax would pick the first option (highest of the maxima is 90). EMV would compute 0.5×90 + 0.5×0 = 45 for the first option and 0.5×70 + 0.5×60 = 65 for the second, so EMV would pick the second. This shows the difference: maximax ignores probabilities, while EMV uses probability-weighted averages.