Maximax maximin equally likely minimax regret
It's a more conservative approach. The formulas for the different criteria can involve a lot of number crunching.
Payoff table example
Maximax decision making is a strategy that appeals to risk takers and business owners who like an aggressive, shoot-the-moon approach. If you're not sure which approach you want to use, you can try out all of them. If you're considering raising prices, make projections for the possible outcomes at different price points. Minimax regret, by contrast, may work better for someone who can't stand losing money. The Laplace criterion and the criterion of realism require more math. This approach would be suitable for an optimist, or 'risk-seeking' investor, who seeks to achieve the best results if the best happens. In most cases, you don't have complete certainty, but you have to make a decision anyway.
With a maximin calculation, you look at the smallest possible gains and pick the best of these. Crunching the Numbers Decision theory isn't just about the types of decisions you make. Why Use Maximax? Geoffrey should therefore decide to supply 70 salads every day.
This approach would be appropriate for a pessimist who seeks to achieve the best results if the worst happens. They're willing to take a long shot if there's a chance they'll win big.
The question is then which output level to choose. Whether it's your nature to use maximax or minimax regret for your judgment calls, decision theory helps you do it thoughtfully.
It's considered a criterion of realism. Laplace criterion. You may be able to improve the results of your maximax strategy by gathering more information.
If you knew exactly what effect a price hike of 10 percent, 15 percent or 25 percent would have on your revenue, the decision would be easy. Maximax is one of the simpler methods. The Laplace criterion and the criterion of realism require more math. The formulas for the different criteria can involve a lot of number crunching. Essentially, this is the technique for a 'sore loser' who does not wish to make the wrong decision. Deciding based on the best possible outcome — the maximax — is one approach. So, how many salads will Geoffrey decide to supply? To solve this a table showing the size of the regret needs to be constructed. This approach would be appropriate for a pessimist who seeks to achieve the best results if the worst happens. Whether it's your nature to use maximax or minimax regret for your judgment calls, decision theory helps you do it thoughtfully. The lower the uncertainty, the better decisions you can make no matter which method you use. You consider the best possible outcome of each option and pick the biggest potential payoff regardless of risk.
In the process, he loses out on the opportunity of making big profits.
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