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# Lesson

DecisionUnderUncertainty
InthisLesson TheSavageMiniMaxregretcriterion. TheLaplaceinsufficientreasoncriterion.

Duration:30minutes

SavageMiniMaxregretcriterion
TheMiniMaxRegretcriterionfocusesonavoidingregretsthatmayresultfrommakinganonoptimal 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 opportunitylossr(ai,j)tothedecisionmakerifactionalternativeaiischosenandstateofnaturej happens to occur. Opportunity loss is the payoff difference between the best possible outcome underjandtheactualoutcomeresultingfromchoosingai.Formally: Ifv(ai,j)correspondstopositiveflowpayoffthen: r(ai,j)=max{v(ak,j)}v(ai,j) (1)

## Ifv(ai,j)correspondstonegativeflowpayoffthen: r(ai,j)=v(ai,j)min{v(ak,j)} (2)

Notethatopportunitylossesaredefinedasnonnegativenumbers.ThebestpossibleOLiszero(no regret)andthehighertheOLvalue,thegreatertheregret. LetstrytopresentthecalculationsofSavageMiniMaxregretcriterionusingtheexamplewiththe companyssuppliesfromLesson1: 1. First we have to calculate the Opportunity Loss table using the formula (1) and the payoff matrixTable2fromLesson1: PayoffsTable a1 a2 a3 a4 InternationalHellenicUniversity ParaskevopoulosKonstantinos 1 1 5 8 21 30 2 10 7 18 22 3 4 OpportunityLossTable a1 a2 1 0 3 2 3 0 3 4

18 25 8 23

10 10 0 4 8 6 0

12 21 19 15

a3 16 11

a4 25 15 11

## BayesianNetworks 2. Wehavetocalculatethemaximumopportunitylossforeachalternative: a1 a2 1 0 3 2 3 0 3 4 max 10 8 16 25

10 10 0 4 8 6 0

a3 16 11

a4 25 15 11

3. Attheendwechoosethealternativewiththeminimummaximumloss.Thusa2.

Laplaceinsufficientreasoncriterion
The Laplace criterion is the first to make use of explicit probability assessments regarding the likelihoodofoccurrenceofthestatesofnature.Asaresult,itisthefirstelementarymodeltouseall of the available information in the payoff matrix. The Laplace argument makes use of Johann Bernoulli'sPrincipleofInsufficientReason.Tobeginwith,Laplacepositsthattodealwithuncertainty rationally,probabilitytheorymustbeinvoked.Thismeansthatforeachstateofnaturejin,the decisionmakershouldassesstheprobabilitypjthatjwilloccur. Now the Principle of Insufficient Reason states that if no probabilities have been assigned by the decisionmaker,thenitfollowstherewasinsufficientreasonfordecisionmakertoindicatethatany onestatejwasmoreorlesslikelytooccurthananyotherstate.Consequently,allthestatesjmust be equally likely. Therefore, the probability pj for every j must be 1/n, where n is the number of statesofnaturein. Ifthevaluev(ai,j)representspositivepayoff(profit)thenalternativeamaxisselectedasthebest: amax=argaimax{ v(ai,j)} (1)

## ifthevaluev(ai,j)representsnegativepayoff(cost)thenalternativeaminisselectedasthebest: amin=argaimin{ v(ai,j)} (2)

IfwetrytoapplythecalculationsofLaplacecriterionontheexamplefromLesson1usingformula2, wegetthefollowingresults:

BayesianNetworks

a1 a2 a3 a4

1 5 8 21 30

2 10 7 18 22

## v(ai,j) 14.5 11.5 18 21.5

18 25 8 23

12 21 19 15

Thusthebestchoiceisalternativea2.