Lecture 2 Theoretical concepts

Question 1

What are decision trees?

Answer 1

Graphical displays of decisions, useful for taking sequential decisions

Question 2

What is the base rate fallacy?

Answer 2

When confronted with both event/person specific and base rate information, we tend to overestimate the importance of the specific information and underestimate the importance of the base rate information.

Question 3

What is the expected value of sample information (EVSI)

Answer 3

This is the aded value of extra information, or how much you are willing to pay for market research.

Calculated as: EVwI - Maximum EMV

Question 4

What is the expected value with sample information (EVwSI)?

Answer 4

This is the average long term outcome with sample information

Question 5

What is the efficiency of sample information?

Answer 5

This measures the quality of sample information by calculating: EVSI / EVPI

Question 6

Why do we need the concept of utility and what is it?

Answer 6

EMV is not always a good indicator of an outcome of a decision because decision makers are not immune to risk. That is why we need utility: the actual value of the decisions made. Rational decision makers try to maximize utility