Lesson

DecisionUnderUncertainty
InthisLesson TheMaximax(MiniMin)criterion. TheMiniMax(MaxiMin)criterion. TheHurwiczcriterion.

Duration:45minutes

Introduction
Decision under uncertainty refers to the situation in which a decision maker doesnt have any knowledgeabouttheprobabilitieswithwitchthevariousstatesofnaturewilloccur.Forexamplethe salesofacompanycanbetotallyunpredictablebecausetherearetoomanyfactorsthataffectsales such as economic standards of population in the given period of time, the reputation of the manufacturer,productavailability,price,warranty,serviceetc. Although decision making under uncertainty is a difficult task, it is perhaps the most common situation a decision maker will have to face, thus various approaches with different criterion have beensuggestedtomodelandsolvesuchproblems.Wewilldescribethedifferentcriterionusingthe followingexample.

Thesuppliesexample
Acompanyshoulddecideonthenumberofsuppliestobepurchasedtomeetcustomerneedsduring the holidays. The exact number of customers is unknown, but is expected to belong to one of the followingcategories:200,250,300or 400customers.Foursupplylevelsare proposed,withleveli beingidealifthenumberofcustomersmeetscategoryi.Deviationsfromtheidealcategory,leadto additional costs, either because they keep extra supplies that are not needed, or because the demandisnotmet. Inthisexample,wehavenoknowledgeabouttheprobabilitiesofoccurrenceofdifferentstatesof naturei.e.demand(200,250,300,400). Inthenextparagraphweshowhowtomodeladecisionproblemunderuncertainty.

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Thepayofftable
Apayoffisaquantitativemeasureoftheresultoftakingaparticularcourseofactioncombinedwith theoccurrenceofaparticularstateofnature.Itisthenetgainorlossobtainedastheoutcomeofthe decision that accrues from a given combination of decision alternatives and events. They are also knownasconditionalprofitvalues.Inbusiness,payoffsareusuallyexpressedusingmonetaryvalues. Indecisionanalysis,however,onecanmakeuseofeithermonetaryvaluesorabstractutilities. Thepayoffestimatesarepresentedintermsoftheinteractionofthedecisionalternativesandthe states of nature in the form of a payoff table. Suppose the problem under consideration has n possiblestatesofnaturedenotedby1,2,,nandmalternativeactionsdenotedbya1,a2,,am. Thenthepayoffcorrespondingtothedecisionsmakerselectedactionaiunderthestateofnaturej willbedenotedbyv(ai.j)andtheresultingpayofftablewillbeliketheoneshowninTable1. Alternatives a1 a2 . . . am States 1 v(a1.1) v(a2.1) . . . v(am.1) 2 v(a1.2) v(a2.2) . . . v(am.2)
Table1

. . .

n v(a1.n) v(a2.n) . . . v(am.n)

The following Table 2 shows the payoff values (costs) for the supplies example presented in the previous paragraph, where states 1, 2, 3, 4 corresponds to 200, 250, 300 and 400 costumers whilea1,a2,a3,a4correspondstosupplylevelsof200,250,300and400pieces. a1 a2 a3 a4 1 5 8 21 30 2 10 7 18 22
Table2

3 18 8 12 19

4 25 23 21 15

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TheMaxiMax(MiniMin)criterion
The MaxiMax (MiniMin) criterion is quite risky as it attempts to describe the decision making behavior of people who are overly optimistic in their expectations. Optimistic decision makers are attractedbylargerewardsandtheyarewillingtoriskhighlossesinordertoobtainthem. Whenthepayoffsarepositiveflowrewardsandthepayoffv(ai,j)representsprofitsorincomethen itispossibletomodeltheoptimistprofilewiththeMaxiMaxdecisionrulewheretheamaxalternative isselected: amax=argaimax{max{v(ai,j)}} Whenthepayoffsaregivenasnegativeflowrewardsandthepayoffv(ai,j)representscostsorloses, theoptimistdecisionruleisMiniMinwhereaminalternativeisselected: amin=argaimin{min{v(ai,j)}} Notethatnegativeflowrewardsareexpressedwithpositivenumbers. Assuming that the companys managers are very optimistic about the number of costumers and thereforetheywouldgoforasupplythatwouldminimizethecost.Usingthepayofftableshownin Table2,theprocessleadingtosuchabehaviorcanbecapturedinthetwostepslogicoftheMiniMin rule: 1. Determinetheminimumpossiblepayoffforeachalternative(courseofaction). Alternatives States a1 a2 a3 a3 1 5 8 21 30 2 10 7 18 22 3 18 8 12 19 4 25 23 21 15 min{v(ai,j)} 5 7 12 15

2. Fromtheseminimums,selecttheminimumpayoff.Thealternativethatcorrespondstothis minimumpayoffisthechosendecisionthusalternativea1.

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TheWaldsMiniMax(MaxiMin)criterion
TheMiniMax(MaxiMin)criterionattemptstodescribethedecisionmakingbehaviorofstakeholders who are overly pessimistic in their expectations. Pessimistic decision makers are averse to large lossesandarewillingtoforgoattractivegainsinordertoavoidalargerisk. It is possible to model the pessimist profile with the MiniMax decision rule when the payoffs are given as negativeflow rewards, and the payoffs v(ai,j) represent costs or losses. Due to MiniMax decisionruletheaminalternativeisselectedasshowninthefollowingformula: min=argaimin{max{v(ai,j)}} OntheotherhanditispossibletomodelthepositiveflowpayoffswiththeMaxiMindecisionrule whenthepayoffv(ai,j)representprofitorincome.DuetoMaxiMindecisionruletheamaxalternative isselectedasshowninthefollowingformula: amax=argaimax{min{v(ai,j)}} Letsassumethatthecompanysmanagersareverypessimisticaboutthenumberofcostumersand thereforetheywouldgoforasupplybearinginmindalowdemand.Usingthepayofftableshownin Table2,theprocessleadingtosuchabehaviorcanbecapturedinthetwostepslogicoftheMiniMax rule: 1. For each alternative determine the maximum payoff possible. This represents the worst possiblelossifthatdecisionalternativewerechosen. Alternatives States a1 a2 a3 a3 1 5 8 21 30 2 10 7 18 22 3 18 8 12 19 4 25 23 21 15 max{v(ai,j)} 25 23 21 30

2. From these maximum payoffs, select the minimum. That is from among the bad outcomes choosetheleastbad.Theactionalternativea3leadingtothispayoffisthechosenaction. InternationalHellenicUniversity ParaskevopoulosKonstantinos 4

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TheHurwiczcriterion
TheHurwiczcriterionattemptstofindamiddlegroundbetweentheextremesposedbytheoptimist andpessimistcriteria.TheHurwichcriterionincorporatesameasureofpessimismandoptimismby assigningacertainpercentageweighttooptimismandabalancetopessimism. Aweightedaveragecanbecomputedforeveryactionalternativewithanalphaweight,calledthe coefficient of realism. The term Realism here means that the unbridled optimism of maximax is replacedbyanattenuatedoptimismasdenotedbythe.Notethat01.Thus,abettername forthecoefficientofrealismiscoefficientofoptimism.An=1impliesabsoluteoptimism(maximax) whilean=0impliesabsolutepessimism(maximin). Selectingavalueforsimultaneouslyproducesacoefficientofpessimism1,whichreflectsthe decision maker's aversion to risk. A Hurwicz weighted average a can now be computed for every actionalternativeaiinaasfollows: Ifpayoffv(ai,j)representprofitsorincome(positiveflowpayoffs)thenamaxalternativeisselected, whereamax: amax=argaimax{max{v(ai,j)}+(1a)min{v(ai,j)}} Ifpayoffv(ai,j)representlossorcost(negativeflowpayoff),thenaminalternativeisselected,where amin: amin=argaimin{min{v(ai,j)}+(1a)max{v(ai,j)}} Lets assume that the companys managers have agreed to assess their level of optimism at 60%. Thus=0.6.UsingthepayofftableshowninTable2,wecouldselectthebestalternativefollowing thestepsofHurwiczdecisionruleasshownbelow. 1. Thecoefficientofoptimismis0.6. 2. Foreveryactionalternativecomputetheminimumandmaximumpayoffvalue. 3. ForeveryactionalternativecomputetheHurwiczweightedaverageusingtheweightsand (1). 4. AttheendwechoosethealternativewiththeminimumHurwiczvalue.Inourcaseasshown inthefollowingtablethebestalternativetofollowisa1. InternationalHellenicUniversity ParaskevopoulosKonstantinos 5

BayesianNetworks Alternatives States a1 a2 a3 a3 1 5 8 21 30 2 10 7 18 22 3 18 8 12 19 4 25 23 21 15 min 5 7 12 15 max 25 23 21 30 =0.6 13 13.4 15.6 21

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