Decision making under uncertainty

Minimax Regret criterion

Decision maker may experience regret after the

decision has been made
Decision maker should attempt to minimize
regret before actually taking decision
• Demand
• High medium low
• 5000; 3000; 2000
• Profit 10
• Loss 2
• High all sold 5000
• 5000 * 10 = 5000
• Low sold only 3000 profit 30,000 – 4000 = 26000
• Medium sold only 4000 Profit 40000 – 2000 =
38000
A High Medium Low
5000 50000 38000 24000
3000
2000
 Minimax Regret criterion
• Determine regret corresponding to each state
of nature for every alternative
Regret of any alternative in a given state of
nature = maximum payoff – payoff of that
alternative for that state of nature
Determine maximum regret for each alternative
Choose the alternative which corresponds to the
minimum of the above maximum regrets
 Payoff table
Minimax Regret criterion
States of nature (Product Demand)

Alternatives High Medium Low

Expand Rs 50,000 Rs 25,000 - Rs 25,000

Construct new Rs 70,000 Rs 30,000 - Rs 40,000

plant
Subcontract Rs 30,000 Rs 15,000 - Rs 1,000

Max = 70000 Max = 30,000 Max = -1,000

 Regret Table
States of nature (Product Demand)

Alternatives High Medium Low

Expand 70,000 - 50,000 30,000 - 25,000 - 1,000

- (- 25,000)
Construct new 70,000 - 70000 30,000 - 30,000 - 1,000
plant - (- 40,000)

Subcontract 70,000 - 30,000 30,000 - 15,000 - 1,000

- (- 1,000)
 Regret table
Minimax Regret criterion
States of nature (Product Demand)

Alternatives High Medium Low Max Regret in

each
alternative
Expand Rs 20,000 Rs 5,000 Rs 24,000 24,000

Construct Rs 0 Rs 0 Rs 39,000 39,000

new plant
Subcontract Rs 40,000 Rs 15,000 Rs. 0 40,000

By selecting the alternative of Expand Regret will be minimised

 Hurwicz Criterion
• Also called weighted average criterion
• It is compromise between maximax and
maximin decision criterion
• Cofficient of optimism (α)
• This concept takes into account both
maximum and minimum for each alternative
• α is chosen based on decision makers degree
of optimism (pessimism)
 Hurwicz Criterion
• The alternative that maximizes the sum of weighted
payoff is selected
Steps:
1. Choose an appropriate value of α i.e. degree of
optimism and 1 – α represents degree of pessimism
2. Determine max and mini payoff of each alternative
3. P = α * Max + (1- α) * Mini
4. Choose the alternative that gives maximum value of P
 Hurwicz Criterion
States of nature (Product Demand)

Alternatives High Medium Low Max Mini

Expand Rs 50,000 Rs 25,000 - Rs 25,000 Rs. 50,000 - Rs 25,000

Construct Rs 70,000 Rs 30,000 - Rs 40,000 Rs. 70,000 - Rs 40,000

new plant
Subcontract Rs 30,000 Rs 15,000 - Rs 1,000 Rs. 30,000 - Rs 1,000

α = 0.8; P(expand) = 50000*0.8 + 0.2*-25000 = 35000

P (Construct) = 70000*0.8 + 0.2*-40000 = 48000
P (Sub Construct) = 30000*0.8 + 0.2*-1000 = 23800
 Alpha

α = 0 is too pessimistic
α = 1 is highly optimistic
A value between 0 and 1 may be chosen
depending on decision makers feeling
In absence of any feelings α = 0.5 may be
chosen.