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Decision Making Without Probabilities

This document discusses three criteria for decision making when probability information is unavailable: the optimistic approach which selects the decision with the largest payoff; the conservative approach which selects the decision with the maximum minimum payoff; and the minimax regret approach which involves constructing a regret table by calculating the difference between each payoff and the largest payoff for each state of nature, then selecting the decision with the minimum maximum regret. An example is provided to illustrate the minimax regret approach.

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Timothy james Palermo
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364 views

Decision Making Without Probabilities

This document discusses three criteria for decision making when probability information is unavailable: the optimistic approach which selects the decision with the largest payoff; the conservative approach which selects the decision with the maximum minimum payoff; and the minimax regret approach which involves constructing a regret table by calculating the difference between each payoff and the largest payoff for each state of nature, then selecting the decision with the minimum maximum regret. An example is provided to illustrate the minimax regret approach.

Uploaded by

Timothy james Palermo
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Decision Making without Probabilities

Wednesday, September 7, 2022 4:38 AM

Decision Making without Probabilities


Three commonly used criteria for decision making when probability information regarding the
likelihood of the states of nature is unavailable are:

1. Optimistic approach - the decision with the largest payoff or lowest cost is chosen.
2. Conservative approach - for each decision, the minimum payoff is listed and the decision
corresponding to the maximum of these payoffs is selected. Or the maximum costs are
determined and the minimum of those is selected.
3. Minimax Regret approach – construction of a regret or opportunity loss table

Optimistic Approach
An optimistic decision maker would use the optimistic maximax approach. We choose the
decision that has the largest single value in the payoff table.

Conservative Approach
A conservative decision maker would use the conservative (maximin) approach. List the
minimum payoff for each decision. Choose the decision with the maximum of these minimum
payoffs.

Minimax Regret Approach


• The minimax regret approach requires the construction of a regret table or an opportunity
loss table
• This is done by calculating for each state of nature the difference between each payoff and
the largest payoff for that state of nature.
• then , using this regret table, the maximum regret for each possible decision is listed.
• The decision chosen is the one corresponding to the minimum of the maximum regrets.

Example:
For the minimax regret approach, first computer a regret table by subtracting each payoff in
a column from the largest payoff in that column. In this example, in the first column, subtract
8, 14, and 20 from 20.

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