March 18, 2017 at 4:04 pm
I’m stuck on the following question, I just can’t seem to work out how the regret table was formulated.
someone please help, I understand the minimax regret philosophy but formulating the regret table without knowing the exact contribution puzzles me.
The committee of a new golf club is setting the annual membership fee. The number of members depends on the membership fee charged and economic conditions. The forecast annual cash inflows from membership fees are shown below.
Membership fee Low Average High
$000 $000 $000
$600 360 480 540
$800 400 440 480
$900 360 405 495
$1,000 320 380 420
If the minimax regret criterion is applied the fee set by the committee would be:
A regret matrix is shown below:
Membership fee Low $000 Average $000 High $000
$600 40 0 0
$800 0 40 60
$900 40 75 45
$1,000 80 100 120
Maximum regret if set fee of $600 is $40k
Maximum regret if set fee of $800 is $60k
Maximum regret if set fee of $900 is $75k
Maximum regret if set fee of $1,000 is $120kMarch 18, 2017 at 5:12 pm
Thanks for your question.
It’s a hard one to explain in written form – hoping you have watched our CIMA P1 videos.
To create the risk matrix itself doesnt need contribution it is calculated from the payoff table – which is given in the question.
A minimax regret person is concerned how bad they will feel if they select the wrong decision for the outcome that occurs.
Eg – how bad will they feel ( what regret will they have) if membership does turn out to be low and they have chosen a $600 price policy.
They will compare the pay off for this $600 / low membership which is $360 and compare to what they could’ve received if they had chosen the best option in those circumstances.
The best option in those circumstances (e.g. low membership) would have been to chose an $800 price point. This would’ve yielded a pay off of $400 – so the amount of regret that you feel from selecting 600price rather than 800price will be 40 ( 400 -360) Every square in the regret table is comparing the payoff received to the best payoff in those circumstances ( best in the column)
There are no negative figures in a regret table – the bigger the regret figure – the worse it feels for the decision maker. Where it shows 0 as the regret – this means this was the best decision in those circumstances so you have no regrets in that case.
I assume you are happy with how to make the final decision with this minimax regret method and it was just building the table of regrets that is causing the problem?
The answer to “minimise the maximum regret” is to charge $600 – let me know if you need this explaining further.
CathMarch 18, 2017 at 5:16 pm
Appreciate the swift response, i literally figured it out about 5minutes after posting this.
Your explanation of the process helps to realise i was on the right lines myself.
Thank you very much.
JoshMarch 23, 2017 at 1:08 am
You’re welcome – thank you
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