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How is Maximax Calculated?

Published in Decision Making 2 mins read

Maximax is a decision-making strategy used in decision theory, particularly when dealing with uncertainty. It focuses on maximizing the maximum potential payoff.

Steps to Calculate Maximax:

  1. Identify the possible outcomes: List all the potential outcomes for each decision option.
  2. Determine the maximum payoff for each outcome: Identify the highest possible payoff for each outcome.
  3. Select the decision option with the highest maximum payoff: Choose the decision option that offers the maximum payoff among all the maximum payoffs identified in step 2.

Example:

Imagine you're deciding between investing in stocks (Option A) or bonds (Option B). You've estimated the potential returns for each option in different market scenarios:

Scenario Stocks (Option A) Bonds (Option B)
Bull Market 20% 5%
Bear Market -10% 2%
Stable Market 8% 3%

Applying Maximax:

  1. Identify the maximum payoff for each option:
    • Stocks (Option A): 20%
    • Bonds (Option B): 5%
  2. Select the option with the highest maximum payoff: Stocks (Option A) has the highest maximum payoff (20%).

Therefore, according to the Maximax strategy, you would choose to invest in stocks (Option A) because it offers the potential for the highest return.

Practical Insights:

  • Maximax is an optimistic approach that focuses on maximizing potential gains.
  • It is suitable for situations where the decision-maker is risk-tolerant and prioritizes potential upside.
  • However, it ignores potential losses and can lead to risky decisions.

Conclusion:

Maximax is a simple decision-making method that helps identify the option with the highest potential payoff. It is an optimistic strategy that prioritizes maximizing gains but doesn't consider potential losses.

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