Lecture15 - Expert Advice We often rely on professionals to...

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3/10/2009 1 Expert Advice ± We often rely on professionals to diagnose problems and recommend and carry out fixes ± Doctors ± Auto Mechanics and Repair Technicians ± Lawyers ± Financial Advisors and Real Estate Agents ± Teachers and Researchers ± Can we expect that professionalism will always guide the expert to work in the clients best interest? Expert Advice ± A customer has a problem. ± Major problem with probability r, 0<r<1 ± Minor problem with probability 1-r ± Major problem requires a Major Repair ± Minor problem only requires a Minor Repair, but can be fixed with a Major Repair as well ± Customer always accepts Minor Repair advice, but may accept or reject Major Repair advice Expert Advice ± The Expert always recommends Major Repair advice for a Major Problem, but may recommend Major Repair for a Minor Problem ± The Expert’s profit Problem Repair Profit Major Major X Minor Minor X Minor Major X1 > X Expert Advice ± The Customer’s costs Problem Repair Cost Major Major E Minor Minor I < E ± Assume that E > I1, so that the Customer might seek a second opinion Major Reject Advice E1 > E Minor Reject Advice I1 > I Expert Advice ± Expert’s Strategies ± H onest ± Always recommend Major Repair for Major Problem ± Always recommend Minor Repair for Minor Problem ± D ishonest ± Always recommend Major Repair ± Customer’s Strategies ± A ccept whatever repair is recommended ± R eject Major Repair advice & seek another remedy, accept minor repair advice Expert Advice ± Expected Payoffs ± (H,A) Expert gets X Customer gets -rE - (1-r)I ± (D,A) Expert gets rX + (1-r)X1 Customer gets -rE - (1-r)E = -E ± (H,R) Expert gets (1-r)X Customer gets -rE1 - (1-r)I ±
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Lecture15 - Expert Advice We often rely on professionals to...

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