Lesson

Decision Under Uncertainty

InThe Savage MiniMax regret criterion. this Lesson
The Laplace insufficient reason criterion.

Duration : 30 minutes

Savage MiniMax regret criterion

The MiniMax Regret criterion focuses on avoiding regrets that may result from making a non optimal decision. Although regret is a subjective emotional state, the assumption is made that it is quantifiable in direct (linear) relation to the rewards of the payoff matrix. Regret is defined as the opportunity loss r(ai,j) to the decision maker if action alternative ai is chosen and state of nature j happens to occur. Opportunity loss is the payoff difference between the best possible outcome under j and the actual outcome resulting from choosing ai. Formally:

If v(ai,j) corresponds to positiveflow payoff then : r(ai,j) = max{v(ak,j)} v(ai,j) (1)

If v(ai,j) corresponds to negativeflow payoff then : r(ai,j) = v(ai,j) min{v(ak,j)} (2)

Note that opportunity losses are defined as nonnegative numbers. The best possible OL is zero (no regret) and the higher the OL value, the greater the regret. Lets try to present the calculations of Savage MiniMax regret criterion using the example with the companys supplies from Lesson 1: 1. First we have to calculate the Opportunity Loss table using the formula (1) and the payoff matrix Table 2 from Lesson 1: Opportunity Loss Table 4 1 2 25 23 21 15 a1 a2 0 3 3 0 11 15

Payoffs Table 2 1 a1 a2 a3 a4 5 8 21 30 10 7 18 22

3 18 8 12 19

3 10 0 4 11

4 10 8 6 0

a3 16 a4 25

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Bayesian Networks 2. We have to calculate the maximum opportunity loss for each alternative: 1 a1 a2 0 3 2 3 0 11 15 3 10 0 4 11 4 10 8 6 0 max 10 8 16 25

a3 16 a4 25 3.

At the end we choose the alternative with the minimum maximum loss. Thus a2.

Laplace insufficient reason criterion

The Laplace criterion is the first to make use of explicit probability assessments regarding the likelihood of occurrence of the states of nature. As a result, it is the first elementary model to use all of the available information in the payoff matrix. The Laplace argument makes use of Johann Bernoulli's Principle of Insufficient Reason. To begin with, Laplace posits that to deal with uncertainty rationally, probability theory must be invoked. This means that for each state of nature j in , the decision maker should assess the probability pj that j will occur.

Now the Principle of Insufficient Reason states that if no probabilities have been assigned by the decision maker, then it follows there was insufficient reason for decision maker to indicate that any one state j was more or less likely to occur than any other state. Consequently, all the states j must be equally likely. Therefore, the probability pj for every j must be 1/n, where n is the number of states of nature in .
If the value v(ai,j) represents positive payoff (profit) then alternative amax is selected as the best:
amax=argaimax{

v(ai,j)}

(1)

if the value v(ai,j) represents negative payoff (cost) then alternative amin is selected as the best:
amin=argaimin{

v(ai,j)}

(2)

If we try to apply the calculations of Laplace criterion on the example from Lesson 1 using formula 2, we get the following results:

International Hellenic University Paraskevopoulos Konstantinos

Bayesian Networks v(ai,j ) 14.5 11.5 18 21.5

1 a1 a2 a3 a4 5 8 21 30

2 10 7 18 22

3 18 8 12 19

4 25 23 21 15

Thus the best choice is alternative a2.

International Hellenic University

Paraskevopoulos Konstantinos

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