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Construct a payoff matrix


One of Philip Mahn's investments is going to mature, and he wants to determine how to invest the proceeds of $30,000. Philip is considering two new investments: a stock mutual fund and a one-year certificate of deposit (CD). The CD is guaranteed to pay an 8% return. Philip estimates the return on the stock mutual fund as 16%, 9%, or -2%, depending on whether market conditions are good, average, or poor, respectively. Philip estimates the probability of a good, average, and poor market to be 0.1, 0.85, and 0.05, respectively. Construct a payoff matrix.

What decision should be made according to the maximax decision rule?

What decision should be made according to the maximin decision rule?

What decision should be made according to the minimax regret decision rule?

What decision should be made according to the EMV decision rule?

What decision should be made according to the EOL decision rule?

How much should Philip be willing to pay to obtain a market forecast that is 100% accurate?

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Business Management: Construct a payoff matrix
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This task provides a clear working example for various decision rule, such as Minimax, maximax, maximin, EMV, EOL and EVPI. The minimization of regret that is highest when one decision has been made instead of another. In a situation in which a decision has been made that causes the expected payoff of an event to be less than expected, this criterion encourages the avoidance of regret. also called opportunity loss

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