Barcenas, James Louis

BBM 114 B4E

The Case of Bob Guthrie summarizes below.

Excellent Good Average Poor

Alternatives
20% 40% 30% 10%
Progressive Products 5,000 2,000 (2,000) (5,000)
Leadville Barts 12,000 6,000 (4,000) (10,000)
TalRad 13,000 7,000 (10,000) (15,000)
Celestial Cellular 30,000 10,000 (20,000) (30,000)
Leadville, TalRad, Celestial 55,000 20,000 (35,000) (60,000)

1. I recommend Bob to engage in Leadville Barts because it has the highest

expected value. Computations are below.

Alternatives Expected Value

Progressiv 5,000 x 0.2 + 2,000 x 0.4 + (2,000) x 0.3 + (5,000) x 0.1 = 700
e Products
Leadville
12,000 x 0.2 + 6,000 x 0.4 + (4,000) x 0.3 + (10,000) x 0.1 = 2,600
Barts
13,000 x 0.2 + 13,000 x 0.2 + (10,000) x 0.3 + (15,000) x 0.1 = 900
TalRad
Celestial 30,000 x 0.2 + 10,000 x 0.4 + (20,000) x 0.3 + (30,000) x 0.1 = 1,000
Cellular
Leadville,
55,000 x 0.2 + 20,000 x 0.4 + (35,000) x 0.3 + (60,000) x 0.1 = 2500
TalRad,
Celestial

2. Computing EVPI using method 2.

Regret Table

Excellen Maximum
Good Average Poor
Alternatives t Regret
40% 30% 10%
20%
18,00 50,000
Progressive Products 50,000 0 0
0
14,00 43,000
Leadville Barts 43,000 2,000 5,000
0
TalRad 42,000 13,00 8,000 10,000 42,000
 0
10,00 18,00 25,000
Celestial Cellular 20,000 25,000
0 0
33,00 55,000
Leadville, TalRad, Celestial 0 0 55,000
0

Multiply each entry in the regret table, by the probability value of each state of nature of
every alternative.

Excellen Good Poor Expected

Average
Alternatives t 40% 10% Regret Value
30% (C)
20% (A) (B) (D) (A+B+C+D)
Progressive Products 10,000 7,200 0 0 17,200
Leadville Barts 8,600 5,600 600 5,000 19,800
TalRad 8,400 5,200 2,400 1,000 17,000
Celestial Cellular 4,000 4,000 5,400 2,500 15,900
Leadville, TalRad, 13,20
0 0 5,500 28,700
Celestial 0

The lowest Expected Regret Value is 17,000, which refers to our EVPI.

3. Was Bob completely logical in how he approached this decision problem?

Based on the data, Bobs goal is to make skiing safer and his bank account
larger. In approaching his decision, all options will make skiing safer but not all
will make his bank account larger. The best decision that he should do is either to
engage to Leadville Barts or TalRad, in which goals of making skiing safer and
most especially bank account get larger, will both be achieved. In short Bob was
illogical, but not completely illogical.