1
1
Expected Monetary Value
UGBA 143:
Game Theory and Business Decisions
2
How much is
in my case?
How much will
I knock off?
3
Previous lecture
Probability models:
– Summarize the set of all possible scenarios
– Estimate probabilities using data
0.15
Miss
0.05
Hit right
0.05
Hit left
0.75
Goal
Probability
Outcome
Buy
No
0.75
0.25
Buy
No
0.75
0.25
Probability trees:
4
Deal or No Deal?
A probability model (table) summarizes the
likelihood of each possible outcome
But it does not tell us what we should do
Need a single measure (single number) for
decision-making purposes
Expected Monetary Value (EMV)
5
Expected Monetary Value
Suppose that Scenarios 1, 2, 3, …,
n
occur with probability
p
1
,
p
2
,
p
3
, …,
p
n
When Scenario
k
occurs, the payoff is
V
k
¾
Expected monetary value
=
p
1
V
1
+ p
2
V
2
+ p
3
V
3
+ … + p
n
V
n
6
What is the EMV
of the amount
in your case?

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