You are contemplating four institutions of higher learning as options for a Mast

Question

You are contemplating four institutions of higher learning as options for a Masters in Business Administration. Each university has strong and weak points and the demand for MBA graduates is uncertain. You meet with advisors assist with the decision. Together they forecast three possible scenarios for the job market and institutional success and predict annual cash flows associated with an MBA from each institution. All cash flows in the table are in thousands of dollars. School KSU GSU GA Tech UGA Scenario Scenario 2 Scenario 3 115 95 110 90 40 80 30 70 45 90 90 80 a) If you use the "Minimax Regret" criterion, which school should you select? b) Assume that the three scenerios have the following probabilities of occurance 0.6, 0.3 and 0.1 respectively. Which school has the HIGHEST (worst) Expected Regret (or Expected Loss)

Explanation / Answer

SOLUTION:

Our Alternatives here are the 4 business institutions: KSU, GSU, GA Tech and UGA

The States of Nature are: Scenario 1, Scenario 2, Scenario 3

Making columns of Alternatives and putting States of Nature in rows, the cash flows table looks like :

PART (a):

The Regret table can be shown as under:

Minimum of 'Maximum' values = Min ( 45, 20, 50, 25 ) = 20 corresponding to GSU School.

Therefore, as per the "Minimax Regret" criterion, we will select GSU School.

Part (b):

The regret table with probabilities look as under :

For KSU: Expected Regret (Expected Loss) = (0.6 * 0) + (0.3 * 40) + (0.1 * 45) = 16.5

For GSU: Expected Regret (Expected Loss) = (0.6 * 20) + (0.3 * 0) + (0.1 * 0) = 12

For GA Tech: Expected Regret (Expected Loss) = (0.6 * 5) + (0.3 * 50) + (0.1 * 0) = 18

For UGA: Expected Regret (Expected Loss) = (0.6 * 25) + (0.3 * 10) + (0.1 * 10) = 19

HIGHEST (Worst) Expected Regret (Expected Loss) = 19 corresponding to School UGA.

Scenario School KSU GSU GA Tech UGA Scenario 1 115 95 110 90 Scenario 2 40 80 30 70 Scenario 3 45 90 90 80

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