16.5.2 Maximin Criterion
This criterion delivers a pessimistic criterion to the decision maker. He first determines the minimum possible payoff for each potential option and then selects the
alternative with maximum payoff within this group. The maximin (Maximum of
minimum) payoff to the company as read from Table 16.3 is ÀRs. 100,000
corresponding to the subcontracting alternative.
16.5.3 Minimax Regret Criterion
Developed by Savage, this decision criterion tries to minimize regret when taking a
decision. It is likely that the decision maker will experience regret after having taken
a decision and the events (i.e., the states of nature) have happened. Thus, the
manager should endeavour to minimize regret before really choosing a particular
strategy (alternative). The basic steps required to apply this criterion are:
1. For every event (state of nature), calculate the regret amount equivalent to each
alternative. The regret for j
th event equivalent to i
th alternative is given by
i
th regret ¼ maximum payoff À i
th payoff
À
Á
for the j
th event
2. Calculate the maximum regret amount for each alternative.
3. Select the alternative corresponding to the minimax. (Minimum of the above
maximum regrets).
Table 16.2 Finding the maximax
Alternatives
States of nature (product demand)
Maximum of row
High.
Moderate
Low
Nil
Rs.
Rs.
Rs.
Rs.
Rs.
Expansion
500,000
250,000
À250,000
À450,000
500,000
Construction
700,000
300,000
À400,000
À800,000
700,000
Subcontracting
300,000
150,000
À10,000
À100,000
300,000
Table 16.3 Finding the maximin
Alternatives
States of nature (product demand)
Minimum of row
High.
Moderate
Low
Nil
Rs.
Rs.
Rs.
Rs.
Rs.
Expansion
500,000
250,000
À250,000
À450,000
À450,000
Construction
700,000
300,000
À400,000
À800,000
À800,000
Subcontracting
300,000
150,000
À10,000
À100,000
À100,000
16.5 Decision Making Under Conditions of Uncertainty
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