Hi
Questions related to decision tree example in notes (OT notes). I have also seen the lectures but just have 2 queries,
1. How to calculate the value of perfect info (from that decision tree in notes)?
2. How to calculate the value of imperfect info (from the decision tree in notes)?
The below is my answer to value of perfect information.
The value of information if information is available
Market research Decision Profit Prob EV
Good Exp. Ref $8670000 68% $5895600
Poor Shutdown $4.8m 32% $1536000
Total = $7431600
The value of decision if no information is available = $71666666
= $7431600 – 7166666 = $264934 (value of perfect info)
Please confirm if the above is right and also advice on how to then calculate the value of imperfect information from the decision tree?
It’s quite confusing. Please shed some light
Ask the Tutor ACCA PM
Decision tree - perfect & Imperfect info
5y ago#1I really would not waste time on this partly because you cannot be asked to draw a tree, and also because any questions on perfect knowledge are most likely to be as I explain in the lecture on the previous knowledge (and calculations on imperfect knowledge are unlikely).
For perfect knowledge:
Without perfect knowledge we would be on the top part of the tree and they would choose the expensive refurbishment which would give 11.17 - 4 = 7.17
With perfect knowledge, if the knowledge said 'good' they would choose expensive refurbishment and get 9.5 (13.5 - 4) and if it said 'bad' they would shut down and get 5.00
Therefore the expected return would be (9.5 x 2/3) + (5 x 1/3) = 8
So the most to pay for perfect knowledge would be 8 - 7.17 = 0.83.
For imperfect knowledge, without it gives 7.17. With it (using the printed answer) gives (point F) 7.63. So the most to pay for imperfect knowledge is 7.63 - 7.17 = 0.46
(A minor point - why do you use 68% and 32%? The probabilities are 2/3 and 1/3. By all means use %'s if you want, but if so they are 67% and 33% :-) )
Thank you :)
5y ago#3You are welcome :-)
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