Minimal regret criterion-laplace criterion of rationality, Managerial Accounting

Minimal Regret Criterion:

This method seeks to minimize the maximum regret that would occur from choosing a particular strategy or alternative. 

The regret is the opportunity loss that occurs from taking one decision given that a certain contingency occurs.

For each state of nature:
Opportunity loss = Max pay off – Payoff under each alternative

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Decision:
Set a price of Sh.4.00 since it minimizes the maximum regret

Methods of Decision Making Under Risk:

In this environment, it is possible to attach probabilities to the various states of nature.  The decision criteria would either be:

  • The expected monetary value
  • The expected opportunity loss

 

The two criteria are same as the choice that maximizes the expected monetary value also minimizes the expected opportunity loss (EOL).

 

Posted Date: 12/4/2012 7:13:42 AM | Location : United States







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