In decision-making under uncertainty, decision-makers often face situations where the outcomes of their decisions are uncertain and influenced by various factors. Different decision criteria are used to evaluate and select the best course of action based on different risk attitudes and preferences. Here are several criteria commonly used in decision-making under uncertainty:
1. Maximax Criterion:
The Maximax criterion, also known as the optimistic criterion, selects the decision alternative that maximizes the maximum possible outcome (best-case scenario). It assumes that the decision-maker is optimistic and seeks to achieve the highest possible gain.
2. Maximin Criterion:
The Maximin criterion, also known as the pessimistic criterion, selects the decision alternative that maximizes the minimum possible outcome (worst-case scenario). It assumes that the decision-maker is pessimistic and seeks to minimize the potential loss or regret.
3. Maximax Criterion:
The Maximax criterion, different from the Maximax criterion mentioned above, selects the decision alternative that maximizes the maximum expected payoff. It considers the probabilities of different outcomes and selects the alternative with the highest expected value.
4. Regret Criterion:
The Regret criterion evaluates decision alternatives based on the difference between the payoff of each alternative and the payoff of the best alternative in each state of nature. It calculates the opportunity loss (regret) associated with each decision alternative and selects the alternative with the minimum regret.
5. Laplace Criterion:
The Laplace criterion calculates the expected value of each decision alternative by assuming equal probabilities for all states of nature. It averages the payoffs of each alternative across all possible outcomes and selects the alternative with the highest expected payoff.
6. Hurwicz Criterion:
The Hurwicz criterion is a compromise between optimism and pessimism. It calculates a weighted average of the maximum payoff and the minimum payoff for each alternative, where the weight parameter (often denoted as
) represents the decision-maker’s level of optimism. The decision alternative with the highest weighted average is selected.
Each criterion has its own advantages and limitations, and the choice of criterion depends on the decision-maker’s risk attitude, preferences, and the nature of the decision problem. By considering these criteria, decision-makers can make informed decisions under uncertainty, taking into account various possible outcomes and their associated risks or opportunities.