Week 8 - Decision Analaysis Tutorial 3 Flashcards
What is ‘perfect information’?
information free from any mistakes it is 100% reliable
What is true of ‘Perfect information ‘ that detracts from its usefulness?
Information can never be perfect, there is always a chance that it could be wrong
Considering that perfect information can never be 100% reliable. What is its use?
It can be used to calculate the money we should be willing to pay for information.
If the value that ‘perfect information’ could provide is lower than the cost of the ‘imperfect information’ we shouldn’t purchase it.
In a market research context, if the research identified a negative demand and the demand as in fact low, what would this signify?
That the information is perfect.
What value is assigned to the value of perfect information when it identifies the correct outcome?
1
Once the expected value with perfect information has been claucled, we can then comapre this…
To the expected value without any information.
If the gain is more than the cost, we should choose market research.
What is the ‘perfect gain’ and how is it calculated?
The maximum that nay piece of market research could be worth.
Perfect Gain = Value with PI - Value without PI
What is meant by the term ‘Efficiency of information’ and how is it calculated?
Efficiency of information compares the actual gain from imperfect information to the gain using perfect information.
Efficiency of information = Actual Gain / Perfect Gain
Efficiency of information can be used as another metric for comparing…
How good a market research company is compared to perfect information.
Under what circumstance is it okay to use monetary values in decision a analysis? And why is this?
When the difference between values is not too extreme.
If values are very dissimilar but have the same EV can result in a sub optimal solution being chosen.
What is the solution to decision analysis when monetary values are vastly different?
Use utility
What is Utility?
A way of calculating Expected Value whilst taking into account the decision makers attitude to risk.
What scale is Utility measured on?
Usually; 0-1
Sometimes; 0-100
By convention, a decision with a higher utility is..
More desirable
A decision with a lower utility is…
Less desirable
How is utility demonstrated on a graph?
Through Utility Curves
When the utility curve is linear, the deacon maker is said to be…
Neutral
When a utility curve is linear, ….. is equal to….
Expected utility is equal to Expected value
When the utility curve is under the risk neutral line the decision maker is said to be…
Risk takers \
If the utility curve is above the risk neutral line the decision maker is said to be…
Risk adverse
When calculating Expected Utility on a decision tree, it is important to subtract…
Any costs (market research) from the far right hand side values before working back through the table
What are the two options for finding the Utility values for many payoffs?
- Comparison method (Evaluate a few plots on the utility curve to find the utility)
- Use a suitable function
Square root of x = Risk Adverse
XSquared = Risk taker
When dealing with decisions without monetary value, we can still use decision analysis so long as…
We can tell when one outcome is better than another
When using decision analysis for non-monetary decisions, what is assigned to the best and worst case scenario?
1 and 0 respectively
Once the utilities for a non-monetary decision have been affirmed, we can then…
Calculate the Expected Utility (using the same method as for Expected value)
