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QUANTITATIVE
METHODS FOR
BUSINESS 8e
Slide 2
Example: Burger Prince
Slide 3
Example: Burger Prince
Slide 4
Example: Burger Prince
s1 .4 10,000
s2 .2
2 15,000
s3 .4
d1
14,000
s1 .4
d2 8,000
1 s2 .2
3 18,000
d3 s3
.4
12,000
s1 .4
6,000
s2 .2
4 16,000
s3
.4
21,000
Slide 5
Example: Burger Prince
Model A
d3
Model C
EMV = .4(6,000) + .2(16,000) + .4(21,000)
4 = $14,000
Slide 6
Expected Value of Perfect Information
Slide 7
Expected Value of Perfect Information
EVPI Calculation
Step 1:
Determine the optimal return corresponding to
each state of nature.
Step 2:
Compute the expected value of these optimal
returns.
Step 3:
Subtract the EV of the optimal decision from the
amount determined in step (2).
Slide 8
Example: Burger Prince
Slide 9
Example: Burger Prince
A B C D E F
1 PAYOFF TABLE
2
3 Decision State of Nature Expected Recommended
4 Alternative s1 = 80 s2 = 100 s3 = 120 Value Decision
5 d1 = Model A 10,000 15,000 14,000 12600
6 d2 = Model B 8,000 18,000 12,000 11600
7 d3 = Model C 6,000 16,000 21,000 14000 d3 = Model C
8 Probability 0.4 0.2 0.4
9 Maximum Expected Value 14000
10
11 Maximum Payoff EVwPI EVPI
12 10,000 18,000 21,000 16000 2000
Slide 10
Risk Analysis
Slide 11
Example: Burger Prince
.50
.40
Probability
.30
.20
.10
5 10 15 20 25
Slide 12
Sensitivity Analysis
Slide 13
Bayes Theorem and Posterior Probabilities
Slide 14
Computing Branch Probabilities
Slide 16
Expected Value of Sample Information
EVSI Calculation
Step 1:
Determine the optimal decision and its expected
return for the possible outcomes of the sample or
survey using the posterior probabilities for the states
of nature.
Step 2:
Compute the expected value of these optimal
returns.
Step 3:
Subtract the EV of the optimal decision obtained
without using the sample information from the
amount determined in step (2).
Slide 17
Efficiency of Sample Information
Slide 18
Example: Burger Prince
Sample Information
Burger Prince must decide whether or not to
purchase a marketing survey from Stanton Marketing
for $1,000. The results of the survey are "favorable" or
"unfavorable". The conditional probabilities are:
P(favorable | 80 customers per hour) = .2
P(favorable | 100 customers per hour) = .5
P(favorable | 120 customers per hour) = .9
Slide 19
Example: Burger Prince
Influence Diagram
Legend:
Market Avg. Number
Decision
Survey of Customers
Chance
Results Per Hour
Consequence
Market Restaurant
Profit
Survey Size
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Example: Burger Prince
Posterior Probabilities
Favorable
P(favorable) = .54
Slide 21
Example: Burger Prince
Posterior Probabilities
Unfavorable
P(unfavorable) = .46
Slide 22
Example: Burger Prince
Slide 23
Example: Burger Prince
Slide 24
Example: Burger Prince
Slide 25
Example: Burger Prince
1 s1 (.696) $10,000
s2 (.217)
I2 7 $15,000
d1 s3 (.087)
(.46)
$14,000
s1 (.696)
d2 $8,000
s2 (.217)
3 8 $18,000
s3 (.087)
d3 $12,000
s1 (.696) $6,000
s2 (.217)
9 $16,000
s3 (.087)
$21,000
Slide 26
Example: Burger Prince
Slide 28
Example: Burger Prince
Slide 29
The End of Chapter 4, Part B
Slide 30