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CMA Foundation · Fundamentals of Business Economics and Management · Decision-making - Types and Process

A payoff table (Rs thousand) for two states of nature, S1 and S2, is: Alternative A: 80, 20; Alternative B: 50, 40; Alternative C: 30, 60. Using the minimax regret criterion, which alternative is chosen and what is its maximum regret?

Alternative B is chosen, with a maximum regret of Rs 30 thousand. The best payoffs are 80 under S1 and 60 under S2. Maximum regrets are 40 for A, 30 for B and 50 for C, so B has the smallest maximum regret.

  1. AAlternative A with maximum regret Rs 40 thousand
  2. BAlternative B with maximum regret Rs 30 thousandCorrect
  3. CAlternative B with maximum regret Rs 20 thousand
  4. DAlternative C with maximum regret Rs 50 thousand

Explanation

Best payoff in S1 is 80 and in S2 is 60. Regrets: A = 0, 40 (max 40); B = 30, 20 (max 30); C = 50, 0 (max 50). The smallest maximum regret is 30 for B. Rs 20 is B's regret under S2 only, not its maximum.

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