Classifications Of Decision Making
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Criterion of pessimism:
- When criterion of pessimism is applied to solve the problem under uncertainty, first determine worst possible outcome in each strategy (row minimums), and select the best of the worst outcome
- in order to select the optimal strategy. The worst outcomes are shown in the left hand side margin.
Best among the worst outcome is 12, hence the manager selects the first strategy. Maximin assumes complete pessimism. Maximax assumes complete optimism.
Degree of optimism and pessimism:
- To establish a degree of optimism or pessimism, the manager may attach some weights to the best and the worst outcomes in order to reflect in degree of optimism or pessimism.
- Let us assume that manager attaches a coefficient of optimism of 0.6 and then obviously the coefficient of pessimism is 0.4. The matrix shown below shows how to select the best strategy when weights are given.
Criterion of regret:
- In regret matrix or opportunity loss matrix subtract all the elements of a column from the highest element of that column. The obtained matrix is known as regret matrix.
- While selecting the best strategy, we have to select such a strategy, whose opportunity loss is zero, i.e. zero regret.
- If we select any other strategy, then the regret is the element at that strategy
Rule for getting the regret matrix:
- In each column, identify the highest element and then subtract all the individual elements of that column, cell by cell, from the highest element to obtain the corresponding column of the regret matrix.
- To select the optimal strategy we first determine the maximum regret that the decision maker can experience for each strategy and then identify the maximum of the maximum regret values. This is shown in the table below: