EXPECTED VALUE OF

PERFECT INFORMATION

Slide 1
 OBJECT

Expected Value of Perfect Information

Decision Analysis with Sample
Information
Developing a Decision Strategy
Expected Value of Sample Information

Slide 2
EXPECTED MONETARY VALUE

A 20
B 30
C 15
A 20
B 22
C 30
Slide 3
EXPECTED MONETARY VALUE

STRATEGI KONTRAK NON KONTRAK

(0,6) (0,4)
A 20 18
B 30 0
C 15 8

Slide 4
Example: Burger Prince
Burger Prince Restaurant is contemplating
opening a new restaurant on Main Street. It has three
different models, each with a different seating
capacity. Burger Prince estimates that the average
number of customers per hour will be 80, 100, or 120.
The payoff table for the three models is as follows:

Average Number of Customers Per Hour

s1 = 80 s2 = 100 s3 = 120

Model A $10,000 $15,000 $14,000

Model B $ 8,000 $18,000 $12,000
Model C $ 6,000 $16,000 $21,000

Slide 5
 Example: Burger Prince
Expected Value Approach
Calculate the expected value for each
decision. The decision tree on the next
slide can assist in this calculation. Here
d1, d2, d3 represent the decision
alternatives of models A, B, C, and s1, s2,
s3 represent the states of nature of 80, 100,
and 120.

Slide 6
 Example: Burger Prince
Decision Tree Payoffs

s1 .4 10,000
s2 .2
2 15,000
s3 .4
d1
14,000
s1 .4
d2 8,000
1 s2 .2
3 18,000
d3 s3
.4
12,000
s1 .4
6,000
s2 .2
4 16,000
s3
.4
21,000

Slide 7
 Example: Burger Prince
Expected Value For Each Decision
EMV = .4(10,000) + .2(15,000) + .4(14,000)
d1 2 = $12,600

Model A

Model B d2 EMV = .4(8,000) + .2(18,000) + .4(12,000)

1 3 = $11,600

d3
Model C
EMV = .4(6,000) + .2(16,000) + .4(21,000)
4 = $14,000

Choose the model with largest EV, Model C.

Slide 8
Example: Burger Prince
Expected Value of Perfect Information
Calculate the expected value for the
optimum payoff for each state of nature
and subtract the EV of the optimal
decision.

EVPI= .4(10,000) + .2(18,000) + .4(21,000) -

14,000 = $2,000

Slide 11
 Example: Burger Prince
Spreadsheet for Expected Value of Perfect Information

A B C D E F
1 PAYOFF TABLE
2
3 Decision State of Nature Expected Recommended
4 Alternative s1 = 80 s2 = 100 s3 = 120 Value Decision
5 d1 = Model A 10,000 15,000 14,000 12600
6 d2 = Model B 8,000 18,000 12,000 11600
7 d3 = Model C 6,000 16,000 21,000 14000 d3 = Model C
8 Probability 0.4 0.2 0.4
9 Maximum Expected Value 14000
10
11 Maximum Payoff EVwPI EVPI
12 10,000 18,000 21,000 16000 2000

Slide 12
EXPECTED OPPORTUNITY LOSS

S1 = 80 S2 = 100 S3 = 120

MODEL A 0 3,000 7,000

MODEL B 2,000 0 9,000

MODEL C 4,000 2,000 0

Slide 13
Expected Value of Perfect Information

MODEL C
4,000 (0.4) + 2,000 (0.2) + 0 (0.4) = 2,000

Slide 14
Expected Value of Sample Information

The expected value of sample information

(EVSI) is the additional expected profit
possible through knowledge of the sample or
survey information.

Slide 20
Efficiency of Sample Information

Efficiency of sample information is the

ratio of EVSI to EVPI.
As the EVPI provides an upper bound for
the EVSI, efficiency is always a number
between 0 and 1.

Slide 22
 Example: Burger Prince
Sample Information
Burger Prince must decide whether or not to
purchase a marketing survey from Stanton Marketing
for $1,000. The results of the survey are "favorable" or
"unfavorable". The conditional probabilities are:
P(favorable | 80 customers per hour) = .2
P(favorable | 100 customers per hour) = .5
P(favorable | 120 customers per hour) = .9

Should Burger Prince have the survey performed

by Stanton Marketing?

Slide 23
 Example: Burger Prince
Influence Diagram

Legend:
Market Avg. Number
Decision
Survey of Customers
Chance
Results Per Hour
Consequence

Market Restaurant
Profit
Survey Size

Slide 24
 Example: Burger Prince
Posterior Probabilities

Favorable

State Prior Conditional Joint Posterior

80 .4 .2 .08 .148
100 .2 .5 .10 .185
120 .4 .9 .36 .667
Total .54 1.000

P(favorable) = .54

Slide 25
 Example: Burger Prince
Posterior Probabilities

Unfavorable

State Prior Conditional Joint Posterior

80 .4 .8 .32 .696
100 .2 .5 .10 .217
120 .4 .1 .04 .087
Total .46 1.000

P(unfavorable) = .46

Slide 26
 Example: Burger Prince
Formula Spreadsheet for Posterior Probabilities
A B C D E
1 Market Research Favorable
2 Prior Conditional Joint Posterior
3 State of Nature Probabilities Probabilities Probabilities Probabilities
4 s1 = 80 0.4 0.2 =B4*C4 =D4/$D$7
5 s2 = 100 0.2 0.5 =B5*C5 =D5/$D$7
6 s3 = 120 0.4 0.9 =B6*C6 =D6/$D$7
7 P(Favorable) = =SUM(D4:D6)
8
9 Market Research Unfavorable
10 Prior Conditional Joint Posterior
11 State of Nature Probabilities Probabilities Probabilities Probabilities
12 s1 = 80 0.4 0.8 =B12*C12 =D12/$D$15
13 s2 = 100 0.2 0.5 =B13*C13 =D13/$D$15
14 s3 = 120 0.4 0.1 =B14*C14 =D14/$D$15
15 P(Unfavorable) = =SUM(D12:D14)

Slide 27
 Example: Burger Prince
Solution Spreadsheet for Posterior Probabilities
A B C D E
1 Market Research Favorable
2 Prior Conditional Joint Posterior
3 State of Nature Probabilities Probabilities Probabilities Probabilities
4 s1 = 80 0.4 0.2 0.08 0.148
5 s2 = 100 0.2 0.5 0.10 0.185
6 s3 = 120 0.4 0.9 0.36 0.667
7 P(Favorable) = 0.54
8
9 Market Research Unfavorable
10 Prior Conditional Joint Posterior
11 State of Nature Probabilities Probabilities Probabilities Probabilities
12 s1 = 80 0.4 0.8 0.32 0.696
13 s2 = 100 0.2 0.5 0.10 0.217
14 s3 = 120 0.4 0.1 0.04 0.087
15 P(Favorable) = 0.46

Slide 28
 Example: Burger Prince
Decision Tree (top half)
s1 (.148)
$10,000
s2 (.185)
4 $15,000
d1 s3 (.667)
$14,000
s1 (.148)
$8,000
d2
5 s2 (.185)
2 $18,000
s3 (.667)
I1 d3 $12,000
s1 (.148)
(.54) $6,000
6 s2 (.185)
$16,000
s3 (.667)
1 $21,000

Slide 29
 Example: Burger Prince
Decision Tree (bottom half)

1 s1 (.696) $10,000
s2 (.217)
I2 7 $15,000
d1 s3 (.087)
(.46)
$14,000
s1 (.696)
d2 $8,000
s2 (.217)
3 8 $18,000
s3 (.087)
d3 $12,000
s1 (.696) $6,000
s2 (.217)
9 $16,000
s3 (.087)
$21,000

Slide 30
Example: Burger Prince
EMV = .148(10,000) + .185(15,000)
d1 4
+ .667(14,000) = $13,593
$17,855
d2
5 EMV = .148 (8,000) + .185(18,000)
2
d3 + .667(12,000) = $12,518
I1
(.54)
6 EMV = .148(6,000) + .185(16,000)
+.667(21,000) = $17,855
1
7 EMV = .696(10,000) + .217(15,000)
I2 d1 +.087(14,000)= $11,433
(.46)
d2
8 EMV = .696(8,000) + .217(18,000)
3
d3 + .087(12,000) = $10,554
$11,433
9 EMV = .696(6,000) + .217(16,000)
+.087(21,000) = $9,475
Slide 31
 Example: Burger Prince
Expected Value of Sample Information
If the outcome of the survey is "favorable"
choose Model C. If it is unfavorable, choose
model A.

EVSI = .54($17,855) + .46($11,433) - $14,000 =

$900.88

Since this is less than the cost of the

survey, the survey should not be purchased.

Slide 32
Example: Burger Prince

Efficiency of Sample Information

The efficiency of the survey:

EVSI/EVPI = ($900.88)/($2000) = .4504

Slide 33
 KASUS 1
RUMAH MAKAN SERVIS KILAT (JUTAAN RUPIAH)

KONDISI DAN PROBABILITAS TERJADI

STRATEGI TETAP PESAING BARU ALIH JALUR
0,5 0,2 0,3
BIARKAN 2 0 -1
PUGAR 4 3 -3
BIKIN BARU 7 2 -10

EVPI = .. ? (Nilai 50)

Slide 34
Rumah Makan Servis Kilat
Posterior Probabilities

Favorable

State Prior Conditional

Tetap .5 .7
Pesaing baru .2 .4
Alih jalur .3 .8

Tentukan EVSI dan Efisiensi of Sample Information!!!

(Nilai 50)

Slide 35