Table 9.4 represents the potential growth rates associated with 3 possible inves

Question

Table 9.4 represents the potential growth rates associated with 3 possible investments invest in bonds, stocks, or deposits. (a) What decision would you make if you were optimistic and applied the maximax criterion? (b) What decision would you make if you were pessimistic and applied the maximin criterion? (c) Which method would you use if you were not neither optimistic nor pessimistic? Apply this method to this problem with a coefficient of optimism alpha = 0.7. The decision maker in X9.7 decides to repeat the calculation but this time the decision making criteria will be dependent upon minimizing regrets. What would the decision maker decide?

Explanation / Answer

X 9.8

In the question X 9.7, we solved it by using Maximin and Maximax approach.

But in this case, we will use minimax regret approach

Regret = Best payoff - payoff received

Original Table with best values in bold

Regret Table

so to minimize regret, which has value 7 , that means decision maker should decide to Invest in Deposits, because it has minimum regrets.

States of nature Growth Medium Growth No Growth Low Growth Bonds 16 9 5 -5 Stocks 11 10 4 -1 Deposits 9 6 9 8 Best 16 10 9 8

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