Minimax criterion

Minimax criterion
See also
Maximin criterion Project evaluation methods Differential costing Markov model Tornado diagram Line balancing Book to market ratio Allocated cost Selection process in conditions of certainty and uncertainty

Min-max criterion - is a decision-making criterion presented in 1954 by Leonard Savage. This criterion minimizes the expected loss associated with making worse than optimal decision, for a given state of nature. In the decision-making process such strategy should be selected, for which the relative loss is the smallest.

Application

According to the criterion you must first find a matrix of relative loss (a matrix of grief). Loss is defined as the difference between the greatest win, for a particular state of nature, and winning that corresponds to the predicted results of current decision. The calculations are made in columns in each of them going to the largest value, and then typed in the array of grief, the difference between the highest value and the currently calculated. This process can be expressed in following equation:

$y_{ij}={\underset {i}{max}}\{a_{ij}\}-a_{ij}$

The next step is, specifying maximum loss for each strategy, and at the end selection of the strategy for which the maximum loss, will be the largest. Model:

$v={\underset {i}{min}}\{{\underset {j}{max}}\{y_{ij}\}\}$

Example

Example: we have an array of payments from the four possible decisions and three possible states:

${\underset {Strategies}{}}\diagdown {\overset {States\ of\ nature}{}}$	I	II	III
T1	200	100	120
T2	0	300	−200
T3	0	300	500
T4	−100	200	0

On this basis cost matrix of relative loss is calculated. Each value is subtracted from max value (500):

${\underset {Strategies}{}}\diagdown {\overset {States\ of\ nature}{}}$	I	II	III
T1	0	200	380
T2	200	0	700
T3	200	0	0
T4	300	100	500

We are looking for the maximum losses for each strategy, and then select the smallest:

Strategies	${\underset {j}{max}}\{a_{ij}\}$
T1	380
T2	700
T3	200
T4	500

Summing up: According to the Min-max manager should choose a strategy T3.

References

• Bierwag, G. O., & Khang, C. (1979). An immunization strategy is a minimax strategy. The Journal of Finance, 34(2), 389-399.