Question

125 Regret Table Success Moderate Success Failure Probability 0.3 0.3 0.4 Sell Company 92 50 0 Form Joint Venture 210 0 108 Sell Software on own 0 138 100 Using the EOL method, which decision altemative will you chose? a) Sell company b) Form Joint Venture C) Sell software on own Submt Answer tommat Tavt

Answer 1

In the table are given the regret values. The concept is that the regret for a particular case is given as (Best payoff - payoff received). These values have alread been calculated and presented to us in the regret table.

We choose the correct alternative by calculating Expected Opportunity Loss (EOL) which is the weighted average of each case, where in the weights are the probabilites

Thus EOL1 (sell company) = [P(success)*92] + [P(moderate success)*50] + [P(failure)*0] = (0.3*92) + (0.3*50) + (0.4*0) = 42.6

Similarly,

EOL1 (form JV) = [P(success)*210] + [P(moderate success)*0] + [P(failure)*108] = (0.3*92) + (0.3*50) + (0.4*0) = 106.2

EOL1 (sell software on own) = [P(success)*0] + [P(moderate success)*138] + [P(failure)*100] = (0.3*92) + (0.3*50) + (0.4*0) = 81.4

Now the selection criteria is that we have to select that option which gives us the maximum return under each scenario combined. In this case, it is the same as saing that we want to reduce the opportunity loss by investing in that option which would increase our profit. Thus we select that option which has the minimum Expected Opportunity Loss which in this case is the option where we sell the company.