# 26 - Expected value is the average of the earnings you get...

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Expected value is the average of the earnings you get if you play an infinite amount of times = 3.83 Decision analysis is prescriptive – Utility theory – normative Descriptive – hypothesis testing (biases) seeking useless info Heuristic – is rule of thumb Normative – correspondence and coherence – probability (are your judgments consistent) Correspondence – fit with the real world Bayes and utility are normative Expected value of decision of knowledge of which number is going to come up = 5.33 The value of this information Value of the decision WITH perfect information – value of the decision WITHOUT perfect information = \$1.50 Miracle movers rents out trucks, but discovers it is one truck short. Small truck = \$130 Large = \$200 Extra cost of second trip = \$150 Probability of 2 trips = 40% Perfect information means = probability of needing a large truck meaning you really need a large truck is 1 Probability of needing a large truck when really you need a small truck is 0 Expected value of the decision with perfect information The value of the decision with perfect information Formula for a joint probability P(“NL” and NL) = P(“NL”|NL)*P(NL) = 1.0*(.4) =.4 P(“NS” and NS) = P(“NS”|NS)*P(NS) = 1.0*(.6)=.6 .4 x 200 + .6 x 130 = 158 EV of the decision – EV of the decision with perfect information = value of the information Value of the information = 190 – 158 = 32

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26 - Expected value is the average of the earnings you get...

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