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You are thinking of taking out
fire insurance on your home.
Perhaps it costs $100 to take
out insurance on a house worth
$100,000 and you ask, “Is it
worth it?”
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• What ultimately matters is the outcome of
the choice process.
• Acts are mere instruments for reaching
good outcomes
• States are devices needed
• Outcomes must be ranked in one way or
another, from the worst to the best for
applying these instruments.
• Qualitative comparison of objects allowed; no information about
differences or ratios. They are invariant up to positive monotone transformations:

• Cardinal Scales: Gives more information than ordinal scales

o Interval Scales
o Ratio Scales
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• Outcomes could be conceived of as ordered pairs of acts and states

• Imagine that you wish to travel from London to Las
Vegas. This route is serviced by two airlines, Black
Jack airlines and Air Mojave, both of which offer
equivalent fares and service levels. Just as you are
about to book your ticket you read in the Times that
Air Mojave is on the brink of bankruptcy.
Maximin criteria
• According to this principle, one should maximize the minimal value
obtainable with each act.

• It is a “pessimistic criteria”
• The maximin rule singles out the worst possible
outcome of a decision as its only normatively relevant
feature. However, one could of course equally well single
out the best possible outcome as being particularly
relevant.

• It is an “optimistic criteria”.
• The degree of optimism can be represented by a real
number α between 0 and 1, such that α = 1 corresponds to
maximal optimism and α = 0 to maximal pessimism.

• The main advantage of the optimism–pessimism rule is that

it allows the decision maker to pay attention to the best-case
and the worst-case scenarios at the same time. The α-index
describes the relative importance of both outcomes.
• Imagine that you are invited to invest in a newly launched software company. Some of your friends,
who invested in similar companies a few years ago, made a fortune. Of course, you may lose the
money, but the investment is rather small, so the fact that the company may go bankrupt is not a
genuine issue of concern. However, you know that if you refrain from making the investment and
the company turns out to be yet another success story, you will feel a lot of regret.
• The principle of insufficient reason prescribes that if
one has no reason to think that one state of the world
is more probable than another, then all states should
be assigned equal probability.