Value of Perfect Information

sammyd22
sammyd22 Well-KnownRegistered Posts: 207
In my recent exam paper there was a 5mark question regarding the value of perfect information similar to this:

Project1 - Project2 - Project3
Probability - Weather:
.3 Good $600 $400 $200
.5 Moderate $200 $150 $100
.2 Poor ($200) $50 ($400)

What is the value that would be paid for perfect information?

I approached the question as follows:

(.3 x $600 + .5 x $200 + .2 x $50) = 180 + 100 + 10 = 290 Therefore a business could afford to pay anything upto this aqmount for perfect info.

As there is a vast amount of knowledge on this forum would anyone be kind enough to advise on whether i approached this correctly?

Comments

  • PGM
    PGM Font Of All Knowledge Registered Posts: 1,954
    Wouldn't it be a different value per project?

    Question lacks info, but I'm assuming the probability is a weighting of importance?
  • SandyHood
    SandyHood Font Of All Knowledge Registered, Moderator Posts: 2,034
    Use your probabilities to find the expected value in the normal way.

    Then do the calculations on the basis of knowing what will happen i.e if good weather then probability x that outcome, if moderate prob x outcome and if bad that, then add them up.

    The difference in expected value between the higher value (when you know which project to pick) and the lower value (based on the normal expected value calculation) is the value of perfect information.
    Sandy
    [email protected]
    www.sandyhood.com
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