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11Expected Monetary ValueUGBA 143:Game Theory and Business Decisions2How much is in my case?How much will I knock off?3Previous lectureProbability models:– Summarize the set of all possible scenarios– Estimate probabilities using data0.15Miss0.05Hit right0.05Hit left0.75GoalProbabilityOutcomeBuyNo0.750.25BuyNo0.750.25Probability trees:4Deal or No Deal?A probability model (table) summarizes the likelihood of each possible outcomeBut it does not tell us what we should doNeed a single measure (single number) for decision-making purposesExpected Monetary Value (EMV)5Expected Monetary ValueSuppose that Scenarios 1, 2, 3, …, noccur with probability p1, p2, p3, …, pnWhen Scenario koccurs, the payoff is Vk¾Expected monetary value= p1V1 + p2V2 + p3V3 + … + pnVn6What is the EMV of the amount in your case?
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