Opportunity Loss table STATES OF NATURE ALTERNATIVES A B C Alternative 1 20 100

Question

Opportunity Loss table

                                                       STATES OF NATURE

ALTERNATIVES                       A                 B                  C

Alternative 1                            20                100                0

Alternative 2                           100                 0                 25

Alternative 3                             0                  40                90

What decisions should be made based on the minimax regret criterion?

Explanation / Answer

The maximin rule involves selecting the alternative that maximises the minimum pay-off achievable. The investor would look at the worst possible outcome at each supply level, then selects the highest one of these. The decision maker therefore chooses the outcome which is guaranteed to minimise his losses. In the process, he loses out on the opportunity of making big profits.

This approach would be appropriate for a pessimist who seeks to achieve the best results if the worst happens.

As he wants to lose very less,

Opportunity Loss table

                                                       STATES OF NATURE

ALTERNATIVES                       A                 B                  C      Total

Alternative 1                            100             40               115     255

Alternative 2                          20            140             25      185

Alternative 3                             120               40              90     250

We subtract from the column total each entry to check the regrets

Hene the minimum 185 i.e. alternative 2 is selected.

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