Minimax Regret Criterion Quiz and Flashcards in Decision Making

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Questions and Answers

What must the decision maker estimate first to apply the concept of expected values as a decision-making criterion?

Potential revenue from each state of nature

Opportunity loss associated with each state of nature

Probability of occurrence of each state of nature (correct)

Cost of each decision alternative

In which decision-making criterion is it assumed that no information regarding the likelihood of the states of nature was available?

Decision making under uncertainty

Equal likelihood criterion (correct)

Expected opportunity loss

Expected value

What is often possible for a decision maker to know to their occurrence, according to the text?

The current market trends

The potential losses associated with each decision alternative

Exact revenue from each state of nature

The probabilities of future states and their occurrence (correct)

Which metric considers the opportunity loss associated with a decision in decision-making under uncertainty?

Expected opportunity loss Signup and view all the answers

When using the concept of expected values as a decision-making criterion, what needs to be computed for each decision alternative?

The probability of occurrence for each state of nature Signup and view all the answers

What is a decision criterion closely related to expected value?

Expected opportunity loss Signup and view all the answers

In the context of decision making under uncertainty, what does the Expected Opportunity Loss measure?

Risk associated with a decision Signup and view all the answers

Which of the following is NOT presented as an option when making decisions with probabilities?

Invest in cryptocurrencies Signup and view all the answers

What is calculated by multiplying the value of each outcome by its corresponding probability?

Expected value Signup and view all the answers

Which measure helps in assessing the potential loss that could be incurred due to a decision?

Expected value of perfect information Signup and view all the answers

In decision making with probabilities, what does the Expected Value represent?

The average value taking into account probabilities Signup and view all the answers

What is the Minimax Regret Criterion used for in decision-making?

Multiplying the probabilities by regret for each decision outcome Signup and view all the answers

How are payoffs calculated under the Minimax Regret Criterion?

By subtracting all payoffs under respective states of nature from a constant value Signup and view all the answers

What is the purpose of the Expected Value of Perfect Information?

To assess additional information value on decision-making Signup and view all the answers

In decision-making, what does multiplying probabilities by regret help to determine?

Total opportunity loss Signup and view all the answers

How is additional information beneficial in making better decisions?

By reducing the uncertainty in decision outcomes Signup and view all the answers

What does the Minimax Regret Criterion consider when evaluating decision outcomes?

Regret and their probabilities of occurrence Signup and view all the answers

Study Notes

Decision Making with Probabilities

The minimax regret criterion is used to evaluate decision outcomes by multiplying probabilities by the regret (opportunity loss) for each outcome.
The expected opportunity loss is calculated by subtracting the payoffs under each state of nature from the maximum possible payoff.

Calculating Expected Value

To apply the concept of expected values as a decision-making criterion, the decision maker must first estimate the probability of occurrence of each state of nature.
The expected value is computed by multiplying the probability of each state of nature by the payoff for each decision alternative.

Example Problem

The problem involves choosing between five options: buying a warehouse for lease, buying an office building for lease, buying stocks, saving in a time deposit, or buying a car for rent.
The expected value for each option is calculated by multiplying the probability of good economic conditions (35%) by the payoff under good conditions, and the probability of poor economic conditions (65%) by the payoff under poor conditions.

Expected Opportunity Loss

Expected opportunity loss is a decision criterion closely related to expected value.
It is calculated by multiplying the probability of each state of nature by the opportunity loss for each decision alternative.

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Description

Learn how to apply the minimax regret criterion in decision making by multiplying probabilities with regret values for each decision outcome. Compare payoffs under different states of nature to make optimal decisions.

Minimax Regret Criterion in Decision Making