DA2-EMV_DOND

# DA2-EMV_DOND - h is How muc se in my ca Expected Monetary...

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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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