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(Don’t 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 don’t 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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This note was uploaded on 10/23/2011 for the course PPE 253 taught by Professor Mellers during the Fall '11 term at UPenn.

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