14 - Ev(sue) = probability(Winning) x (4000 fee) + (1...

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Square = Decision Node – under control of decision maker Circle = Chance Node – NOT under control of decision maker How do you decide? U = Utility - U(sure thing) - U(risky option) = p(B) x U(B) + (1 – p(B)) x U(W) - Can set U(B) = 100 and U(W) = 0 - Determine U(Sure thing) - Set the utilities equal to each other U(Sure Thing) = U(Risky Option) U(Sure Thing) = p(B)*U(B) + (1-p(B))*U(W) U(Sure Thing) = p(B)*100 + (1-p(B))*0 Suppose U(Sure Thing) = 35 35 = p(B)*100 + (1- p(B))*0 Solve for p(B) P(B) = 35/100 = 35% Probability of best outcome occurring is 35% Sometimes more than one variable is unknown Don’t sue = the status quo don’t look behind, look at the current situation
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Unformatted text preview: Ev(sue) = probability(Winning) x (4000 fee) + (1 probability(winning)) x (-Fee) Set EV(sue) = EV(Dont Sue) Trying to maximize expected value-Most utility is deprive from this analysis (strictly using dollars) ASSIGN PROBABLITIES TO EACH OPTION R&D yes 2 million R&D no .2(3) + .55(21) + .25(43) = 22.9 million .7(23) + .3(-10) You dont need to set the options equal to each other if one of the options has their higher utility regardless Quality adjusted life expectancy turn qualities of life into numbers- negative numbers mean worse than death...
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