Page 299 - DCOM303_DMGT504_OPERATION_RESEARCH

Operations Research

Notes 14.4.2 Optimistic Decision Criterion
The optimistic decision criterion, or what is sometimes called the maximax or minimin criterion,
assures the decision maker that he will not miss the opportunity to achieve the greatest possible
payoff or lowest possible cost. However, this decision-making behaviour usually involves the
risk of a large loss. The approach is optimistic in that, we anticipate the best (maximum profit or
minimum cost) possible payoff for any strategy we might choose. The optimal strategy is then
the best (maximum for a profit table and minimum for a cost table) of the anticipated outcomes.
In decision problems dealing with costs, the minimum for each alternative is considered and
then the alternative, which minimizes the above minimum costs, is selected. This is termed as
minimin principle.

Steps for Decision under Optimistic Criteria

The formal procedure for finding the optimistic decision is as follows:
1. For each possible strategy, identify the best payoff value. Record this number in a new
column.
2. Select the strategy with the best anticipated payoff value. This will be a maximum for a
profit table and minimum for a cost table.

14.4.3 Savage Opportunity Loss Decision Criterion

The opportunity loss decision criterion, sometimes called the Savage minimax regret decision
criterion, was proposed by the economist Savage. It assures the decision maker that the
opportunities for payoff that he has missed (or lost) because of the random occurrence of a
possible unfavorable event will be as small a value as is possible. The approach assumes that for
each strategy-event pair, a regret (or opportunity loss) value can be computed equal to the
difference between what the payoff could have been (had he chosen the optimal strategy for this
event) and what it actually is for the strategy chosen and the event that has occurred.
The decision process then anticipates the worst (maximum) opportunity loss for each possible
strategy and chooses as the optimal strategy the one with the minimum anticipated opportunity
loss.

Steps for Decision under Savage Regret Criteria

The formal procedure for finding the opportunity-loss decision is as follows:
1. From the conditional payoff table, develop the conditional opportunity loss table as
follows:
(a) For the first possible event, identify the best possible payoff value.
(b) For each possible strategy, subtract the actual conditional payoff value from the best
value. These results are the regret or opportunity loss values for this event.
(c) Repeat steps (a) and (b) for all possible events.
2. For each possible strategy, identify the worst or maximum regret value. Record this
number as a new column.
3. Select the strategy with the smallest (minimum) anticipated opportunity loss value.

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