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Richa Nandra, Lovely Professional University Unit 8: Expected Value with Perfect Information (EVPI)

Unit 8: Expected Value with Perfect Information (EVPI) Notes

CONTENTS

Objectives
Introduction
8.1 Expected Value with Perfect Information (EVPI)
8.1.1 Cost of Uncertainty

8.1.2 Marginal Analysis
8.2 Use of Subjective Probabilities in Decision Making
8.3 Use of Posterior Probabilities in Decision Making
8.4 Summary

8.5 Keywords
8.6 Self Assessment
8.7 Review Questions
8.8 Further Readings

Objectives

After studying this unit, you will be able to:
 Define expected value

 Describe expected value with perfect information
Introduction

In last unit, you will studied about random variable. This unit will provide you information
related to expected value with perfect information.

8.1 Expected Value with Perfect Information (EVPI)

The expected value with perfect information is the amount of profit foregone due to uncertain
conditions affecting the selection of a course of action.
Given the perfect information, a decision maker is supposed to know which particular state of
nature will be in effect. Thus, the procedure for the selection of an optimal course of action, for
the decision problem given in example 18, will be as follows:

If the decision maker is certain that the state of nature S will be in effect, he would select the
1
course of action A , having maximum payoff equal to Rs 200.
3
Similarly, if the decision maker is certain that the state of nature S will be in effect, his course of
2
action would be A and if he is certain that the state of nature S will be in effect, his course of
1 3
action would be A . The maximum payoffs associated with the actions are Rs 200 and Rs 600
2
respectively.

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