Saturday, January 2, 2010

Maximin, Maximax and Minimax Regret Decision Criteria/Rules

Decision makers may use any one of the above criteria to make decisions in the following situations:

• Where probabilities are available but the decision maker is not interested in average, long-run values (expected values) but on actual one-off outcomes.

• Where it is not possible to assign meaningful probabilities to alternative courses of action.


The criterion used by the decision maker will be dependent upon his risk attitude:

Risk seeker management will use maximax rule
Risk averter management will use maximin rule
Risk neutral management will use minimax regret rule

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(1) Maximax Rule

It is a strategy which maximizes the maximum gain.

A risk seeker manager using the rule will select the option with the largest payoff based on the assumption that the best possible outcome will occur for all the available options.



(2) Maximin Rule

It is a strategy which maximizes the minimum gain (or minimizes the maximum loss)

A risk averse manager using this rule will select the option with the largest payoff based on the assumption that the worst possible outcome will occur for all the available options.



(3) Minimax Regret Rule

It is a strategy which seeks to minimize the maximum possible regret ie opportunity cost that will be incurred as a result of having made the wrong decision (e.g. contribution/profit/cost savings forgone). The opportunity cost associated with each decision option will be summarized in a regret matrix (opportunity cost table).

A risk neutral manager using this rule will select the option with the lowest regret/opportunity cost based on the assumption that the maximum regret will occur for all the available decision options.


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1 comment:

  1. Hello blessings,
    Did you find this information or is it from a certain journal article that can be accessed?
    I would really appreciate a cite of some sort.
    Thank you!

    ReplyDelete