Expected Value and Decision Making

This video tutorial explains how to make decisions using Expected Value with a Payoff Table of costs. It covers calculating Expected Values for decision alternatives and the Expected Value of Perfect Information (EVPI). The tutorial demonstrates how to determine probabilities for states of nature and compute expected values for different decision alternatives. It also explains how to calculate EVPI by comparing expected values with and without perfect information, emphasizing the importance of absolute values in cost problems.

What is the primary focus of the video tutorial?

• How to make decisions based on intuition.

• How to calculate the probability of events.

• How to create a Payoff Table.

• How to make decisions based on Expected Value using a Payoff Table.

What is the probability of state s3?

• 0.5

• 0.2

• 0.4

• 0.3

How is the expected value for decision alternative d1 calculated?

• 0.3*11 + 0.5*7 + 0.2*14

• 0.3*13 + 0.5*9 + 0.2*12

• 0.3*10 + 0.5*8 + 0.2*12

• 0.3*12 + 0.5*9 + 0.2*13

Which decision alternative has the lowest expected value?

• d4

• d3

• d2

• d1

What decision is made when payoffs are costs?

• Choose the alternative with the average expected value.

• Choose the alternative with the lowest expected value.

• Choose the alternative with the highest expected value.

• Choose the alternative with the median expected value.

What is the expected value for decision alternative d2?

• 10.7

• 11.6

• 13.6

• 12.5

What is the expected value for decision alternative d3?

• 11.6

• 10.7

• 13.5

• 12.5

What does EVPI stand for?

• Expected Value of Perfect Information

• Expected Value of Partial Information

• Expected Value of Probable Information

• Expected Value of Possible Information

How is the EVwPI calculated?

• By knowing the state of nature with certainty before making a decision.

• By guessing the state of nature.

• By using the average of all possible states.

• By choosing the state with the highest probability.

What is the expected value with perfect information (EVwPI)?

• 7.6

• 10.7

• 11.6

• 12.5