Least worst regret analysis for decision making under uncertainty, with applications to future energy scenarios
Least worst regret (and sometimes minimax) analysis are often used for decision making whenever it is difficult, or inappropriate, to attach probabilities to possible future scenarios. We show that, for each of these two approaches and subject only to the convexity of the cost functions involved, it is always the case that there exist two "extreme" scenarios whose costs determine the outcome of the analysis in the sense we make clear. The results of either analysis are therefore particularly sensitive to the cost functions associated with these two scenarios, while being largely unaffected by those associated with the remainder. Great care is therefore required in applications to identify these scenarios and to consider their reasonableness. We also consider the relationship between the outcome of a least worst regret and a Bayesian analysis, particularly in the case where the regret functions associated with the scenarios largely differ from each other by shifts in their arguments, as is the case in many applications. We study in detail the problem of determining an appropriate level of electricity capacity procurement in Great Britain, where decisions must be made several years in advance, in spite of considerable uncertainty as to which of a number of future scenarios may occur, and where least worst regret analysis is currently used as the basis of decision making.