MAXMAX OPTIMISTIC APPROACH

This equation is used to solve a  three (3) state of nature decision analysis problem using the optimistic approach (MAXMAX).

ELEMENTS FOR DECISION

State of Nature (S): These are the outcomes of any cause of action which rely on certain factors beyond the control of the decision maker.

Cause of Action (D): A decision made among a set of defined alternative causes of action.

Uncertainty (P): The chances that an event will occur is indicated in terms of probabilities assigned to that event.

Pay Off: This measures the net benefit to the decision maker from a combination of courses of action taken. 

Optimistic Approach attracts the maximum payoffs for each decision alternative and selects the maximum

EXAMPLE

Given the Following

                     S1      S2     S3

Action                                                    MAX        MAX (best payoff)

D1              20        25      10    =             25  

D2              30        55      12   =             55                   72                             

D3              30        10      72   =              72                                                

D3 has the best pay off using optimistic approach

REFERENCES

Gichuhi, K J & Ndung'u, N D (2013) Quantitative Methods for Business Management : Decision Analysis and Trees. Nairobi : Finesse.

Investopedia (2015) Expected Value. Retrieved on 23rd March 2015 From : http://www.investopedia.com/terms/e/expected-value.asp