Payoff table tutorial question The payoff table below shows for an insurance company the profit expected

(m) from three possible choices (A, B and C) with respect to increasing insurance premiums depending upon four scenarios of the weather in the forthcoming year (W1 to W4 respectively). Using standard decision criteria would you suggest the company do? W1 10 20 15 W2 -30 -10 70 W3 40 20 20 W4 50 25 30

A B C

Payoff table tutorial answer The payoff table is: A B C W1 10 20 15 W2 -30 -10 70 W3 40 20 20 W4 50 25 30

Hence we have: Optimistic maximax maximise the maximum payoff for each choice, choose C of value 70 Conservative (pessimistic) maximin - maximise the minimum payoff for each choice, choose C of value 15 Regret minimax minimise the maximum regret for each choice. The regret matrix is: W1 W2 W3 W4 A 10 100 0 0 B 0 80 20 25 C 5 0 20 20 so here choose C of value 20 Equally likely maximise average payoff. Here the average payoffs are: A 17.5; B 13.75 and C 33.75, so choose C of value 33.75

In this particular case as all of the standard decision criteria agree with each other we would choose C.