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Quantitative Methods: Prospective Profits and Losses

The table shows both prospective profits and losses for a company, depending on what decision is made and what state of nature occurs. Use the information to determine what the company should do.

s1 s2 s3
d1 30 80 -30
d2 100 30 -40
d3 -80 -10 120
d4 20 20 20

a. if an optimistic strategy is used.
b. if a conservative strategy is used.
c. if minimax regret is the strategy.

Solution Preview

a) An optimistic decision maker would use the optimistic approach. All we really need to do is to choose the decision that has the largest single value in the payoff table. This largest value is 120, and hence the optimal decision is d3.

b) A conservative decision maker ...

Solution Summary

This job uses the point of view of an optimistic decision maker.