REGRET MATRIX

Source: MathCracker

Minimax Regret Criterion

The Minimax Regret Criterion is a technique used to make decisions under
uncertainty. The context of a decision making process under uncertainty, a
decision maker is faced to uncertain states of nature and a number of decision
alternatives that can be chosen. The decision made and the final state of nature
(which the decision maker does not know beforehand) determines the payoff.

Under this Minimax Regret Criterion, the decision maker calculates the maximum
opportunity loss values (or also known as regret) for each alternative, and then
she chooses the decision that has the lowest maximum regret.

The regret or opportunity loss for a specific alternative, at a given state of nature,
is how much we lose by choosing that alternative and not the optimal alternative,
given that state of nature (if the current alternative IS the optima alternative, then
the opportunity loss for that alternative, given the state of nature, is 0).

The Minimax Regret Criterion is not the only strategy to make decisions under
uncertainty. Depending on the risk stance and whether or not the probability of
the states of nature are known, there are other alternatives, such as the Maximax
criterion (the optimistic criterion), the Maximim criterion (the pessimistic
criterion), Hurwicz's Criterion Method, the EOL method, or the Expected Monetary
Value Criterion, just to mention a few.

The Maximax Criterion

The Maximax criterion, or optimistic criterion is a technique used to make
decisions under uncertainty. The setting is for a decision make to be faced to
uncertain states of nature and a number of decision alternatives that can be
chosen. The decision made and the final state of nature (which the decision
maker does not know beforehand) determines the payoff

Under this optimistic criterion, the decision maker calculates the best possible
payoff for each decision alternative (among all possible states of nature, for that
specific alternative), and then she chooses the decision that has the maximum
best possible outcome. So, this method is considering that things will go well, so I
will better choose the highest possible best outcome.

This is called the Maximax criterion, because it considers the maximum among
the maximum of all possible decision options.
The Maximin Criterion
The Maximin criterion, or pessimistic criterion is a technique used to make
decisions under uncertainty. The setting is for a decision make to be faced to
uncertain states of nature and a number of decision alternatives that can be
chosen. The decision made and the final state of nature (which the decision
maker does not know beforehand) determines the payoff.

Under this pessimistic criterion, the decision maker calculates the worst possible
payoff for each decision alternative (among all possible states of nature, for that
specific alternative), and then she chooses the decision that has the maximum
worst possible outcome. So, this method is considering that things will go badly,
so I will better choose the highest possible worst outcome.

This is called the Maximin criterion, because it considers the maximum among
the minimum of all possible decision options.

Hurwicz's Criterion
Hurwicz's Criterion, or the realism criterion is a technique used to make decisions
under uncertainty. The setting is for a decision make to be faced to uncertain states
of nature and a number of decision alternatives that can be chosen. The decision
made and the final state of nature (which the decision maker does not know
beforehand) determines the payoff.

Under this realism criterion, the decision maker calculates a weighted average
between the best and worst possible payoff for each decision alternative (among all
possible states of nature, for that specific alternative), and then she chooses the
decision that has the maximum weighted average. So, this method is considering
that things will go somewhere in the middle between going well and badly.

For each decision alternative, the weight α is used to compute Hurwicz value;

Hi=α×imax+(1−α)×imin

EOL Criterion
The Expected Opportunity Loss (EOL) Criterion, is a technique used to make
decisions under uncertainty, under the assumption that the probabilities of each
state of nature is known. The context of a decision-making process under
uncertainty, a decision maker is faced to uncertain states of nature and a number
of decision alternatives that can be chosen. The decision made and the final
state of nature (which the decision maker does not know beforehand) determines
the payoff.

Under this EOL criterion, the decision maker calculates the expected value of the
opportunity loss values for each alternative, and then she chooses the decision
that has the minimum EOL.

For decision alternative i, the expected opportunity loss is

EMVi=j=1∑kpj×OLij
where the opportunity loss for a specific alternative, at a given state of nature, is
how much we lose by choosing that alternative and not the optimal alternative,
given that state of nature (if the current alternative IS the optima alternative, then
the opportunity loss for that alternative, given the state of nature, is 0).

EMV Criterion
The Expected Monetary Value (EMV) Criterion, is a technique used to make
decisions under uncertainty, under the assumption that the probabilities of each
state of nature is known. The context of a decision making process under
uncertainty, a decision maker is faced to uncertain states of nature and a number of
decision alternatives that can be chosen. The decision made and the final state of
nature (which the decision maker does not know beforehand) determines the
payoff.

Under this EMV criterion, the decision maker calculates the expected value of the
payoff for each alternative, and then she chooses the decision that has the maximum
weighted average.

For decision alternative ii, the expected monetary value is

EMVi=j=1∑kpj×Mij
Minimax Regret Criterion
The Minimax Regret Criterion is a technique used to make decisions under
uncertainty. The context of a decision making process under uncertainty, a
decision maker is faced to uncertain states of nature and a number of decision
alternatives that can be chosen. The decision made and the final state of nature
(which the decision maker does not know beforehand) determines the payoff.

Under this Minimax Regret Criterion, the decision maker calculates the maximum
opportunity loss values (or also known as regret) for each alternative, and then
she chooses the decision that has the lowest maximum regret.

The regret or opportunity loss for a specific alternative, at a given state of nature,
is how much we lose by choosing that alternative and not the optimal alternative,
given that state of nature (if the current alternative IS the optima alternative, then
the opportunity loss for that alternative, given the state of nature, is 0).