Minimax Regret

So, first you establish a regret matrix. Al forms of regret arise from looking back and wishing you had made a different decision (I wish I hadn’t studied that at college, I wish I hadn’t started ACCA!). You know the result, but knowing the outcome wish you had done something else. If these are the profits:

Choice made: 1 2 3

Economy 1 1100 2000 1500

Economy 2 1800 1200 800

Economy 3 1200 500 2000

Then the regret matrix will be as follows. Remember you now know which economy prevailed and you compare the best decision you could have made to the others:

Choice made: 1 2 3

Economy 1 900 0 500

Economy 2 0 600 1000

Economy 3 800 1500 0

So if economy turns out to have happened, you would regret nothing if you had happened to have made Choice 2. The other two will leave you kicking yourself that you hadn’t gone for Choice 2 and the regrets is how far below the best the other results are.

Similarly if it turns out that either of the other economies happen.

Hope you can make sense of this – impossible to set out the martix properly here.

No. The economy only has one outcome: it is whatever it is.

If Economy 1 prevails, we are only dealing with the top row and the regrets are 900, 0, 500.

In the example I set out, I did not go on the establish the decision rule for minimax regrets. I only established the regret matrix. To finish the problem you then say:

If I choose 1, the maximum regret (going down the column) is 1,800
If I choose 2, the maximum regret (going down the column) is 2,000
If I choose 3, the maximum regret (going down the column) is 2,000

The least bad of these is 1,800, so Choice 1 would be made.

Look again at Chapter 8 notes and lectures if still unclear.