Suppose a small business investor has a certain amount of money available to invest now. Four alternative investments are available. Th estimated profits of each investment under each economic condition are indicated in the following table. Alternatives States of Nature S1 S2 S3 S4 A1 $170 $45 -$60 $100 A2 $30 $190 $175 -$65 A3 $145 -$50 $120 $110 A4 -$40 $80 $10 $70 Based on the above information, what would be the amount of regret, if alternative A1 is selected by the investor and suppose that the state of nature turns out to be S4? Note: don't insert the dollar sign ($) when answering the question.
Question
Suppose a small business investor has a certain amount of money available to invest now. Four alternative investments are available. Th estimated profits of each investment under each economic condition are indicated in the following table.
Alternatives States of Nature S1 S2 S3 S4 A1 45 -100 A2 190 65 A3 50 110 A4 -80 70 Based on the above information, what would be the amount of regret, if alternative A1 is selected by the investor and suppose that the state of nature turns out to be S4? Note: don't insert the dollar sign ($) when answering the question.
Solution
To calculate the regret, we first need to identify the best outcome in state S4. Looking at the table, we can see that the best outcome in state S4 is $110 (from alternative A3).
The regret is calculated as the difference between the best outcome and the actual outcome. If the investor chooses alternative A1 and the state of nature turns out to be S4, the actual outcome is $100.
So, the regret would be 100 (actual outcome) = $10.
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