Real Estate Investment Example

PAYOFF TABLE State of Nature

Good Economic Poor Economic

Decision Conditions Conditions
Apartment building $ 50,000 $ 30,000
Office building $ 100,000 $ (40,000)
Warehouse $ 30,000 $ 10,000

Maximax decision = $ 100,000 Office Building

Maximin decision = $ 30,000 Apartment

Regret Table State of Nature

Good Economic Poor Economic
Decision Conditions Conditions
Apartment building $ 50,000 $ -
Office building $ - $ 70,000
Warehouse $ 70,000 $ 20,000

Minimax Regret Decision $ 50,000 Apartment building

Hurwicz alpha - for Good Condition ; 1-alpha = for Poor Econom

Alpha 0.4
1-Alpha 0.6
Apartment building = $ 38,000 <-Select the largest
Office building = $ 16,000
Warehouse = $ 18,000

Equal Likelihood 50-50 ratio

Apartment building = $ 40,000 <-Select the largest
Office building = $ 30,000
Warehouse = $ 20,000

Expected value of decision State of Nature

Good Economic Poor Economic
Decision 0.4 0.6
Apartment building $ 50,000 $ 30,000
 Office building $ 100,000 $ (40,000)
Warehouse $ 30,000 $ 10,000

Best Expected value $ 38,000 Apartment Building

Expected Opportunity Loss (EOL) State of Nature

Good Economic Poor Economic
Decision 0.4 0.6
Apartment building $ 50,000 $ -
Office building $ - $ 70,000
Warehouse $ 70,000 $ 20,000

Best EOL $ 20,000 Apartment Building

 Maximum Minimum
$ 50,000 $ 30,000
$ 100,000 $ (40,000)
$ 30,000 $ 10,000

MAX(E7:E9) MAX(C7:D7)
MAX(F7:F9) MIN(C7:D7)

$C$11-C7
Maximum
$ 50,000
$ 70,000
$ 70,000

MIN(E17:E19)
$C$12-D7
ondition ; 1-alpha = for Poor Economic

Formula
C7*C24+D7*C25
C8*C24+D8*C25
C9*C24+D9*C25

C7*0.5+D7*0.5

<-use actual data

Expected value
$ 38,000 C39*$C$38+D39*$D$38 38,000.00
$ 16,000 C40*$C$38+D40*$D$38 16,000.00
$ 18,000 C41*$C$38+D41*$D$38 18,000.00

MAX(E39:E41)

<-use Regret Table

Expected
Opportunity Loss
$ 20,000 C48*$C$47+D48*$D$47 $ 20,000.0
$ 42,000 C49*$C$47+D49*$D$47 $ 42,000.0
$ 40,000 C50*$C$47+D50*$D$47 $ 40,000.0

MIN(E48:E50)
PAYOFF TABLE State of Nature
Alternative Growing Stable Declining Maximum Minimum
Bonds 40 45 5 45 5
Stocks 70 30 -13 70 -13
Mutual Fund 53 45 -5 53 -5

Maximax (Optimistic) 70 <-Stocks

Maximin (Pessimistic) 5 <-Bonds

Maximum
REGRET TABLE 70 45 5
Growing Stable Declining Maximum
Bonds 30 0 0 30
Stocks 0 15 18 18
Mutual Fund 17 0 10 17

MinMax 17 <-Mutual Fund

Probabilities
EXPECTED MONETARY VALUE (EMV) 0.2 0.5 0.3 0.333333
Growing Stable Declining EMV
Bonds 40 45 5 32.0
Stocks 70 30 -13 25.1
Mutual Fund 53 45 -5 31.6

Best EMV 32.0 <-Bonds

Probabilities
EXPECTED OPPORTUNITY LOSS (EOL) 0.2 0.5 0.3
Growing Stable Declining EOL
Bonds 30 0 0 6.0
Stocks 0 15 18 12.9
Mutual Fund 17 0 10 6.4

Best EOL 6.0 <-Bonds

0.2