7.3 The minimax regret rule The minimax regret strategy is the one that minimises the maximum regret. Essentially this is the technique for a ‘sore loser’ who does not wish to make the wrong decision.
‘Regret’ in this context is defined as the opportunity loss through having made the wrong decision.
Illustration 12 – Applying minimax regret rule
In the pay-off matrix above, if the market state had been scenario Ⅰ:
§ The correct decision would have been:B (net income $80)
§ If A had been chosen instead:The company would have been out of pocket by $60 (i.e. 80 – 20)
§ If C had been chosenIt would have been out of pocket by $70 (i.e. 80 – 10)
§ The opportunity loss associated with each product is:
A = $60, B = $0, C = $70.
The opportunity losses for a given market state are obtained by subtracting each value in the row from the highest value in that row.
The completed opportunity loss (‘regret’) table is thus as follows.
Decision
StateABC
Ⅰ60070
Ⅱ60300
Ⅲ06010
Maximum regret606070
The maximum regret value for:中 华 考 试 网
A = $60
B = $60
C = $70
The minimum value of these is $60, hence the minimax regret strategy would be either A or B.
B would probably be adopted because its second-highest regret outcome ($30) is lower than the second-highest for A ($60). |