Chapter 12 - Making Hard Decisions R. T. Clemen, T. Reilly...

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Unformatted text preview: Making Hard Decisions R. T. Clemen, T. Reilly Chapter 12 Value of Information Lecture Notes by: J.R. van Dorp and T.A. Mazzuchi http://www.seas.gwu.edu/~dorpjr/ Slide 1 of 29 COPYRIGHT 2006 by GWU Draft: Version 1 Value of Information Chapter 12 aking Hard ecisions R. T. Clemen, T. Reilly Making Hard Decisions R. T. Clemen, T. Reilly Chapter 12 Value of Information Lecture Notes by: J.R. van Dorp and T.A. Mazzuchi http://www.seas.gwu.edu/~dorpjr/ Slide 2 of 29 COPYRIGHT 2006 by GWU Draft: Version 1 Introduction Often you pay for information you are asking for: Investment Advice Management Consultants Market Investigation Palm Reading You need this information to make a decision in the future: To invest in a particular stock or not To restructure the organization of your company or not To introduce a product or not Should I marry this person or not Making Hard Decisions R. T. Clemen, T. Reilly Chapter 12 Value of Information Lecture Notes by: J.R. van Dorp and T.A. Mazzuchi http://www.seas.gwu.edu/~dorpjr/ Slide 3 of 29 COPYRIGHT 2006 by GWU Draft: Version 1 Introduction Problem at hand: Given your decision problem, how much should you be willing to pay for this information? To answer this questions you have to determine the value (in dollars) of information. We will first discuss a method for determining the value of perfect information and next for imperfect information . WHICH ONE DO YOU VALUE MORE? Making Hard Decisions R. T. Clemen, T. Reilly Chapter 12 Value of Information Lecture Notes by: J.R. van Dorp and T.A. Mazzuchi http://www.seas.gwu.edu/~dorpjr/ Slide 4 of 29 COPYRIGHT 2006 by GWU Draft: Version 1 Probability and Perfect Information Definition: Clairvoyant Expert on event A If event A is about to occur, the expert says, it will. If event A is not to occur, the expert says, it will not. The expert is NEVER wrong. His information is PERFECT . A = { Dow Jones index goes up} "A" = { Expert Says Dow Jones index goes up} You are considering investing in a company, but before you do you want to make sure that the Dow Jones index will go up as this increases your chances of making a good investment. Therefore, you decide to consult a clairvoyant expert on the event A. Making Hard Decisions R. T. Clemen, T. Reilly Chapter 12 Value of Information Lecture Notes by: J.R. van Dorp and T.A. Mazzuchi http://www.seas.gwu.edu/~dorpjr/ Slide 5 of 29 COPYRIGHT 2006 by GWU Draft: Version 1 Probability and Perfect Information What does it mean to be clairvoyant in probabilistic terms ? Pr( { Expert Says Dow Jones } | { Dow Jones } ) = Pr( "A" | A ) = 1 Similarly: ) | " " Pr( 1 ) | " " Pr( 1 1 ) | " Pr(" = = = A A A A A A 1 ) | " " Pr( ) | " " Pr( 1 ) | " Pr(" = = = A A A A A A Perhaps more importantly, what about?...
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This note was uploaded on 01/26/2010 for the course ADMS 3300 taught by Professor Shamimabdullah during the Spring '10 term at York University.

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Chapter 12 - Making Hard Decisions R. T. Clemen, T. Reilly...

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