2 7 0C H A P T E R 1 2 ■ C h o i c e sThe problem with the rule of insufficient reason is that it may seem
arbitrary to assume that unknown probabilities are equal. Often we sus-
pect that the probabilities of various outcomes are not equal, even while
we do not know what the probabilities are. Moreover, the rule of insuffi-
cient reason yields different results when the options are described differ-
ently. We can distinguish four possibilities: Wye goes bankrupt, Wye stays
the same size, Wye increases in size, and Wye decreases in size but stays
in business. If we do not have any reason to see any of these outcomes as
more likely than any other, then the rule of insufficient reason tells us to
assign them equal probabilities. On that assumption, and if you will keep
your job as long as Wye stays in business, then you have only one chance
in four of losing your job; so your expected income in the job at Wye is
now $22,500 ( 5 0.75 3 $30,000). Thus, if we stick with the rule of insuffi-
cient reason, the expected value of the job at Wye and whether you should
take that job seem to depend on how the options are divided. That seems
crazy in this case.
Another approach tries to work without any assumptions about
probability in cases of ignorance. Within this approach, several rules
might be adopted. One possibility is the maximax rule, which tells you to
choose the option whose best outcome is better than the best outcome of
any other option. If you follow the maximax rule, then you will accept the
job with the Wye Company, because the best outcome of that job is a sal-
ary of $30,000 when this new company does not go bankrupt, and this is
better than any outcome with the Exe Company. Optimists and risk takers
will favor this rule.
Other people are more pessimistic and tend to avoid risks. They will favor
a rule more like the maximin rule, which says to choose the option whose
worst outcome is better than the worst outcome of any other option. If you
follow the maximin rule, you will accept the job with the Exe Company, be-
cause the worst outcome in that job is a steady salary of $20,000, whereas
the worst outcome is unemployment if you accept the job with the Wye
Company.
Each of these rules works by focusing exclusively on part of your
information and disregarding other things that you know. The maximax rule
considers only the best outcomes for each option—the best-case scenario.
The maximin rule pays attention to only the worst outcome for each
option—the worst-case scenario. Because they ignore other outcomes, the
maximax rule strikes many people as too risky (since it does not consider
how much you could lose by taking a chance), and the maximin rule strikes
many people as too conservative (since it does not consider how much you
could have gained if you had taken a small risk).97364_ch12_ptg01_263-272.indd 270 15/11/13 11:00 AM
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