Exercise 2:

1. The following matrix gives the payoff of different strategies (alternatives) S1, S2, S3, S4, and S5
against conditions (events) N1, N2, N3, N4, and N5. Compute and find the best strategy using the
Laplace Criterion, Criterion of Optimism, and Criterion of Pessimism.

LAPLACE CRITERION

S1 = 1/n (P1 + P2+......+Pn) S2 = 1/n (P1 + P2+......+Pn)

S1 = 1/5 (2500 + 530 + -750 + 1000 + 3000) S2 = 1/5 (310 + 2000 + 960 + 3100 + 380)
S1 = 1/5 (6280) S2 = 1/5 (6750)
S1 = 1256 S2 = 1350

S3 = 1/n (P1 + P2+......+Pn) S4 = 1/n (P1 + P2+......+Pn)

S3 = 1/5 (250 + 1900 + 1450 + 250 + 1500) S4 = 1/5 (1350 + 400 + 1000 + 380 + 2300)
S3 = 1/5 (5350) S4 = 1/5 (5430)
S3 = 1070 S4 = 1086

S5 = 1/n (P1 + P2+......+Pn)

S5 = 1/5 (-480 + 320 + 3700 + -600 + 500)
S5 = 1/5 (3440)
SS5 = 688

N1 N2 N3 N4 N5 Expected
Payoff
S1 2500 530 -750 1000 3000 1256
S2 310 2000 960 3100 380 1350
S3 250 1900 1450 250 1500 1070
S4 1350 400 1000 380 2300 1086
S5 -480 320 3700 -600 500 688
CRITERION OF OPTIMISM

A. MAXIMAX CRITERION (PAYOFF MATRIX)

N1 N2 N3 N4 N5 Maximum
S1 2500 530 -750 1000 3000 3000
S2 310 2000 960 3100 380 3100
S3 250 1900 1450 250 1500 1900
S4 1350 400 1000 380 2300 2300
S5 -480 320 3700 -600 500 3700

B. MINIMUM CRITERION (COST MATRIX)

N1 N2 N3 N4 N5 Minimum
S1 2500 530 -750 1000 3000 -750
S2 310 2000 960 3100 380 310
S3 250 1900 1450 250 1500 250
S4 1350 400 1000 380 2300 380
S5 -480 320 3700 -600 500 -600

CRITERION OF PESSIMISM
A. MAXIMIN CRITERION (PAYOFF MATRIX)

N1 N2 N3 N4 N5 Minimum
S1 2500 530 -750 1000 3000 -750
S2 310 2000 960 3100 380 310
S3 250 1900 1450 250 1500 250
S4 1350 400 1000 380 2300 380
S5 -480 320 3700 -600 500 -600

B. MINIMAX CRITERION (COST MATRIX)

N1 N2 N3 N4 N5 Maximum
S1 2500 530 -750 1000 3000 3000
S2 310 2000 960 3100 380 3100
S3 250 1900 1450 250 1500 1900
S4 1350 400 1000 380 2300 2300
S5 -480 320 3700 -600 500 3700

2. The following matrix gives the costs of different strategies against conditions. Compute and find
the best strategy using the Minimax Regret Criterion and Hurwicz Criterion.

MINIMAX REGRET CRITERION (SAVAGE CRITERION)

A. MAXIMIZATION PROBLEM (PAYOFF MATRIX)

(Max. Payoff – Payoff)

N1 N2 N3 N4
S1 0 450 4150 0
S2 2720 490 2250 450
S3 1200 0 2990 1600
S4 3850 1050 0 1440
 Minimax Criterion

N1 N2 N3 N4 Maximum
S1 0 450 4150 0 4150
S2 2720 490 2250 450 2720
S3 1200 0 2990 1600 2990
S4 3850 1050 0 1440 3850

B. MINIMIZATION PROBLEM (COST MATRIX)

(Cost – Min. Cost)

N1 N2 N3 N4
S1 3850 600 0 1600
S2 1130 560 1900 1150
S3 2650 1050 1160 0
S4 0 0 4150 160

Minimax Criterion

N1 N2 N3 N4 Maximum
S1 3850 600 0 1600 3850
S2 1130 560 1900 1150 1900
S3 2650 1050 1160 0 2650
S4 0 0 4150 160 4150

HURWICZ CRITERION / CRITERION OF REALISM

A. MAXIMIZATION PROBLEM (PAYOFF MATRIX)

N1 N2 N3 N4 Max Min WO
S1 3100 1000 -900 2000 3100 -900 1500
S2 380 960 1000 1550 1550 380 1082
S3 1900 1450 260 400 1900 260 1244
S4 -750 400 3250 560 3250 -750 1650
 a = 0.6
WO = a. Max + (1 – a). Min S2 = (0.6 x 1550) + (1-0.6) (380)
S1 = (0.6 x 3100) + (1– 0.6) (-900) S2 = 930 + 152
S1 = 1860 + (-360) S2 = 1082
S1 = 1500

S3 = (0.60 x 1900) + (1-0.6) (260) S4 = (0.6 x 3250) + (1-0.6) (-750)

S3 = 1140 + 104 S4 = 1950 + (-300)
S3 = 1244 S4 = 1650

B. MINIMIZATION PROBLEM (COST MATRIX)

N1 N2 N3 N4 Min Max WO
S1 3100 1000 -900 2000 -900 3100 1100
S2 380 960 1000 1550 380 1550 965
S3 1900 1450 260 400 260 1900 1080
S4 -750 400 3250 560 -750 3250 1250

a = 0.5
WO = a. Min + (1-a). Max S2 = (0.5 x 380) + (1-0.5) (1550)
S1 = (0.5 x (-900) + (1-0.5) (3100) S2 = 190 + 775
S1 = -450 + 1550 S2 = 965
S1 = 1100

S3 = (0.5 x 260) + (1-0.5) (1900) S4 = (0.5 x (-750) + (1-0.5) (3250)

S3 = 130 + 950 S4 = (-375) + 1625
S3 = 1080 S4 = 1250