Professional Documents
Culture Documents
and
EXPECTED VALUE
Prepared by
Mirafuentes, Adami, Fabriga, Omongos & Quimno
Objectives:
To know and understand the following:
(1) Decision Theory
(2) Mathematical Expectation (ME) or Expected Value (EV)
(3) Value Information
(4) Degree of Certainty in Decision Making
- Decision Under Complete Certainty
- Decision Under Uncertainty
- Decision Under Risk
(5) Expected Value of Perfect Information (EVPI)
(6) Decision Tree Analysis
Introduction
EV =1/2(1000)+1/2(800)
=500 -400
=100
Solution:
EV=40%(2.5million) – 60%(1.5million)
= 1,000,000 – 900,000
EV= 100,000
Payoff Table
Shows the expected payoffs for each
alternative under the various possible states of
nature.
Facilitates comparison of alternatives.
Example:
Stereo Industries, Ltd., a company that plans to expand its
product line, must decide to build a small, medium, or a
large facility plant to produce the products.
Example:
What is the best alternative in the previous payoff table, if it
is known with certainty that the demand will be:
a. Low
b. Moderate
c. High
Solution:
Thus, if we know that the demand will be low, we
would choose to build a small facility with a payoff
of P350,000. If the demand will be moderate a
medium facility with the highest payoff of P420,000
should be chosen. For high demand, a large
facility with the highest payoff should be chosen.
Decision Under Uncertainty
Maximin
-takes into account only the worst possible
outcome for each alternative
Maximax
-takes into account only the best possible
outcome for each alternative
Laplace
- takes into account only the best average
possible outcome for each alternative
Minimax Regret
-determines the worst regret for each
alternative, and chooses the alternative with the
“best worst”
Examples:
Maximin
- the best of the worst is 350; it leads to
building the small facility
Maximax
- the overall best is 560; it leads to building
the large facility
Laplace
Row Total Row Average
Small facility 1,050 350
Medium facility 1,085 361.67
Large facility 490 163.33
LOW = 35%
MODERATE = 40%
HIGH = 25%
Possible Future Demand
Alternatives
Low Moderate High
Alternatives
Low Moderate High