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- The Hurwicz Criterion, presented in a paper in 1951, is probably the earliest novel contribution to the field of economics for which Leo has been recognized. It provides a formula for balancing pessimism and optimism in decision-making under uncertainty – that is, when future conditions are to some extent unknown.
www.leonidhurwicz.org/hurwicz-criterion/
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The Hurwicz Criterion. The Hurwicz Criterion, presented in a paper in 1951, is probably the earliest novel contribution to the field of economics for which Leo has been recognized. It provides a formula for balancing pessimism and optimism in decision-making under uncertainty – that is, when future conditions are to some extent unknown.
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The Hurwicz criterion is a decision-making approach used under uncertainty that combines optimism and pessimism by weighing the best and worst possible outcomes. This method helps decision-makers evaluate options by assigning a coefficient of optimism to the best outcome and a coefficient of pessimism to the worst outcome, allowing for a ...
This video demonstrates applying the Hurwicz criterion to decision making under uncertain conditions.
- 5 min
- 4.2K
- Linda Williams
Hurwicz's Criterion, or the realism criterion is a technique used to make decisions under uncertainty. The setting is for a decision make to be faced to uncertain states of nature and a number of decision alternatives that can be chosen.
- Chapter 16
- Decision Theory
- Steps in Decision Theory
- Decision Making Environments
- • Decision makers know with certainty the
- Maximax Criterion
- Maximin Criterion
- Equal Likelihood Criterion
- Minimax Regret
- Regret Table
- Summary of Results
- Decision Making Environments
- Probabilistic Uncertainty
- Expected Value of Perfect Information (EVPI)
- EVPI Computation
- Utility Theory
- PEAS/Environment
Mausam (Based on slides of someone from NPS, Maria Fasli)
“an analytic and systematic approach to the study of decision making” Good decisions: Bad decisions: based on reasoning not based on reasoning consider all available data and possible alternatives do not consider all available data and possible alternatives employ a quantitative approach do not employ a quantitative approach A good decision may occ...
List the possible alternatives (actions/decisions) Identify the possible outcomes List the payoff or profit or reward Select one of the decision theory models Apply the model and make your decision
Decision making under certainty Decision making under uncertainty Non-deterministic uncertainty Probabilistic uncertainty (risk)
consequences of every decision alternative – Always choose the alternative that results in the best possible outcome
“Go for the Gold” Select the decision that results in the maximum of the maximum rewards A very optimistic decision criterion Decision maker assumes that the most favorable state of nature for each action will occur Most risk prone agent
“Best of the Worst” Select the decision that results in the maximum of the minimum rewards A very pessimistic decision criterion Decision maker assumes that the minimum reward occurs for each decision alternative Select the maximum of these minimum rewards Most risk averse agent
• Assumes that all states of nature are equally likely to occur Maximax criterion assumed the most favorable state of nature occurs for each decision Maximin criterion assumed the least favorable state of nature occurs for each decision Calculate the average reward for each alternative and select the alternative with the maximum number Average re...
Regret/Opportunity Loss: “the difference between the optimal reward and the actual reward received” Choose the alternative that minimizes the maximum regret associated with each alternative Start by determining the maximum regret for each alternative Pick the alternative with the minimum number
If I knew the future, how much I’d regret my decision... Regret for any state of nature is calculated by subtracting each outcome in the column from the best outcome in the same column
Criterion Maximax Maximin Equal likelihood Realism Minimax regret Decision Build a large plant Do nothing Build a small plant Build a large plant Build a small plant
Decision making under certainty Decision making under uncertainty Non-deterministic uncertainty Probabilistic uncertainty (risk)
Decision makers know the probability of occurrence for each possible outcome Attempt to maximize the expected reward Criteria for decision models in this environment: Maximization of expected reward Minimization of expected regret Minimize expected regret = maximizing expected reward!
It may be possible to purchase additional information about future events and thus make a better decision Thompson Lumber Co. could hire an economist to analyze the economy in order to more accurately determine which economic condition will occur in the future How valuable would this information be?
Look first at the decisions under each state of nature If information was available that perfectly predicted which state of nature was going to occur, the best decision for that state of nature could be made expected value with perfect information (EV w/ PI): “the expected or average return if we have perfect information before a decision has to b...
Adds a layer of utility over rewards Risk averse |Utility| of high negative money is much MORE than utility of high positive money Risk prone Reverse Use expected utility criteria...
Performance: utility Environment Static – Stochastic – Partially Obs – Discrete – Episodic – Single Actuators alternatives ask for perfect information Sensor State of nature
- 468KB
- 45
May 3, 2013 · The Hurwicz’s criterion is one of the classical decision rules applied in decision making under uncertainty as a tool enabling to find an optimal pure strategy both for interval and scenarios uncertainty.
The Hurwicz criterion is arguably one of the most widely used rules in decision-making under uncertainty. It allows the decision maker to simultaneously take into account the best and the worst possible outcomes, by articulating a "coefficient of optimism" that determines the emphasis on the best end. The Hurwicz criterion can be viewed as a ...
