This isn’t a political opinion to debate, I provided an explanation as you seemed to have got something muddled, I'm more than happy to admit if I'm factually wrong about something it seems to be more of an issue for you in this instance, you’ve now replied twice without any clarification, just some vague waffle about decision theory and a claim that I'm supposedly talking about something completely different:
It is used in multiple fields:
Simple example - lets say the total payable under a fixed rate deal is 50k, lets say interest rates are low and would result in a total payable for 47k but if they rise will result in a total amount payable of say 55k. (of course the variable rate can result in multiple values being paid in total but having one above and one below will suffice here)
Whats our maximum loss whether rates stay the same or rise under the fixed scenario?
max[50,50] = 50
What is our maximum loss under the variable rate scenario?
max[47,55] = 55
What is the minimum of these maximum losses?
min[50,55] = 50
So we pick the fixed rate if we're to minimise the maximum loss, this is the pessimistic strategy, look at what the worst case is, what the greatest amount you can lose is under each choice and minimise it. Now maximising the minimum loss makes no sense i.e. you want to make the minimum you lose as big as possible!!! In this simple scenario that actually works out to be the fixed rate too (check for yourself if you don't believe me) but could give you some silly solutions in others as ought to be obvious.
The optimistic strategy is, as mentioned before, the max max one linked to (with ref: to gains) or in this case (as we're looking at losses) taking the scenario that provides the minimum of the minimum possible losses, essentially looking at which choice offers the best result and hoping we have a best case scenario. It is trivial enough to work through a simple example again and show this means picking the variable rate.
Ah so now it makes sense, your confusing the abilty to evaluate the scenario with imperfect information. as I said before its not a closed system, this is quite key. But anyway I really dont want to go any further down the dowie rabbit hole.
Your also again confusing costs and losses. we are either seeking to minimise cost or minimise
risk, or if you look at it the other way looking to maximise the opportunity to pay as little as possible or maximise the security of having a known rate.
Which boils down to, do you want to minimise the cost, or maximise the security.
Lets go back to what i said, that in your true land of wierd you took offence to. It was to make the OP think about their motivataion, its the same question as an IFA will ask but in a different way, they will normally start the conversation in regards appetite for risk.
"Second is the minmax maxmin question, do you want to minimise the maximum you
will pay (then take the 10 year fix) or maximise the minimum you
may pay (take the lowest rate you can get at any one time)"
We have perfect information about one path, we have imperfect information about the other path. We could go into EV analysis on a number of scenarios of the second.
I am sorry it tweaked your pedantry gene.
I will reword it, assume simple english here with normal definitions.
"Second is the choice of strategy, do you seek to limit the maximum you will pay by minimising the risk of higher rates with the ten year fix, or do you seek to maximise the opportunity to pay the minimum by taking the lowest rate you can achieve at any one time"
I have never found anyone who doesn't get the point before.
But cool, nice way to derail another thread