This is a decision-making-under-uncertainty case.

There are two events: a favorable market (event 1) and an

unfavorable market (event 2). There are four alternatives, which include do nothing (alternative 1), invest in
corporate bonds (alternative 2), invest in preferred stock (alternative 3), and invest in common stock (alternative 4).
The decision table is presented below. Note that for alternative 2, the return in a good market is
a f
$30,000 1 0.13 5 $55,273 . The return in a good market is $120,000 4 $30,000 for alternative 3, and
$240,000 8 $30,000 for alternative 4.

Event 1 Event 2
Alternative 1 (not invest) 0 0
Alternative 2 (bonds) 55,273 10,000
Alternative 3 (preferred) 120,000 15,000
Alternative 4 (common) 240,000 30,000

Solutions:

Equally Likely
Alternative Expected Value
1 0.0
2 22,636.5
3 52,500.0
4 105,000.0 best

Maximin
Alternative Expected Value
1 0 best
2 10,000
3 15,000
4 30,000

Maximax
Alternative Maximax Payoff
1 0
2 55,273
3 120,000
4 240,000 best

Probability of 0.11 of Success

Alternative Payoff
1 0.00 best
2 2,819.97
3 150.00
4 300.00

1. Sue Pansky is a risk avoider and should use the maximin decision approach. She should do nothing and not
make an investment in Starting Right.

2. Ray Cahn should use a success probability of 0.11. The best decision is to do nothing.

3. Lila Battle should eliminate alternative 1, doing nothing, and apply the maximin criterion. The result is to do
nothing.
4. George Yates should use the equally likely decision criterion. The best decision for George is to invest in
common stock.

5. Pete Metarko is a risk seeker. He should invest in common stock.

6. Julia Day can eliminate the preferred stock alternative and still offer alternatives to risk seekers (common
stock) and risk avoiders (doing nothing or investing in corporate bonds).