Class_8_Decision_Slides

# 2013 qso 510 45 decision alternative favorable market

• Notes
• MoMofish
• 48
• 100% (2) 2 out of 2 people found this document helpful

This preview shows page 45 - 48 out of 48 pages.

2013 QSO 510 45 Decision Alternative Favorable Market Unfavorable Market Expected Value Build large plant 400,000 -300,000 -20,000 Build small plant 80,000 -10,000 26,000 Don’t build 0 0 0 Probabilities 0.4 0.6 Expected Value with Perfect information = EVwPI = 0.4(400,000)+0.6(0) = \$160,000 Expected Return without Perfect information = \$26,000 EVPI = EVwPI – EMV = \$160,000 - \$26,000 = \$134,000

Subscribe to view the full document.

Pay a coin toss game How much are you willing to pay to play? St. Petersburg Paradox 2013 46 QSO 510 Decision Making with Utility Outcome First heads is on toss #1 First heads is on toss #2 First heads is on toss #3 First heads is on toss #4 First heads is on toss #5 ..... Probability 1/2 1/4 1/8 1/16 1/32 ..... Payoff \$1 \$2 \$4 \$8 \$16 ..... "few of us would pay even \$25 to enter such a game" ——Martin (2004) ܧܸ = 1 2 \$1 + 1 4 \$2 + 1 8 \$4 + ⋯ →∞
Two prisoners Offered with following deal Prisoner’s Dilemma 2013 47 QSO 510 Decision Making with Game Theory Both confess and end up with 20 years!

Subscribe to view the full document.

Take-away Payoff Table Decision making criteria Decision tree Notes and examples HW 6 Due Week 9 Lecture Your job 2013 48 QSO 510
• Spring '13
• WenjunGu
• Tom Brown